Governor's optimism divides the City

MERVYN King's confident prediction that High Street spending will pick up later this year has split the City, sparking disagreement over prospects for the wider economy.

The Governor of the Bank of England has chastised the media for its gloomy headlines about the High Street, criticising a tendency to over-react to the significance of any one event. His view, rammed home in a speech in Bradford this week, is that the spending slowdown will be temporary.

But a growing number of analysts warn that King's optimism is unfounded. Rob Carnell at ING says it is 'without substance' while David Brown at Bear Stearns cautions that 'a consumer-led slowdown could quite easily turn into a consumer-led recession'.

Having driven 80% of the expansion in the economy since 1997, a prolonged and sharp consumer downturn would clearly have major implications if other parts of the economy fail to compensate. It is precisely this scenario that is troubling John Butler at HSBC.

'The dilemma for the UK is if the retail sector is no longer a key engine of UK growth, which sector will pick up the growth baton?' he said. 'The industrial and export sector remains weak, the Government boost is set to lessen and corporates seem intent on saving rather than spending.'

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However, Philip Shaw at Investec points out retail sales only account for 35% of total consumer spend, the remainder being on services ranging from restaurants to travel.

So far, the service sector has been relatively resilient. Provided this continues, the economy should avoid the slump that many fear. Robert Barrie at CSFB says: 'A slowdown in retail sales does not necessarily reflect what's going on in the consumer sector as a whole. We don't see any reason why spending shouldn't pick up later this year. The outlook for the economy is absolutely fine.'

Professor Andrew Clare at Legal & General believes record employment, steady income growth and solid confidence will underpin the economy. 'Retail sales growth is far from recessionary territory,' he said. 'The panic-laden headlines are far from justified. It is unlikely we'll see a drop in consumer spending, but some drop in spending growth is inevitable as consumers become a little more cautious.'