Shock fall in High Street spending

THE City was totally wrong-footed for the second month in a row by a shock fall in High Street spending.

Defying predictions of a bounce-back after December's drop, retail sales volumes fell again in January. The fall this time was 0.3%, according to official figures, driving the year-on-year rate of increase to 4.2% - the weakest in a year.

Adding insult to injury, the December fall was revised down to 0.4% compared with the original 0.3% figure. Economists had predicted a revision in the other direction.

This was the first time sales had fallen for two successive months since the Asian financial crisis in the autumn of 1998.

Reaction to the news, which flies in the face of survey and anecdotal evidence that consumer spending is bowling along at a pace not seen since the late-1980s boom, was swift. Sterling fell a third of a cent to $1.4250. Short sterling futures, which track interest rate expectations, bounced as predictions of higher rates were slashed.

The City now expects 4.5% rates by September, rather than June. However, it still sees them at 5% by Christmas. The British Chambers of Commerce said the news opened the door for further rate cuts.

'It is far too early to say that the economy is faltering, but if the slowdown on the High Street continues, then consumers might need a helpful nudge from the Bank of England,' the organisation's chief economist Ian Fletcher said.

Attempts by retailers to bump up prices was offered as an explanation of the weak sales performance. Underlying inflation jumped from 1.9% in December to 2.6% in January.

'Part of the reason, about half, for the weak sales is undoubtedly weaker discounting,' economist Michael Hume at Lehman Brothers said. 'But the rest remains something of a mystery.'

Brian Hilliard at Societe Generale said a sharp deceleration in earnings growth was behind the fall. 'These data will give the Bank some breathing space and allow it to leave rates at 4% until well into the third quarter,' he said.

There was brighter news from the manufacturing sector. After six months of falling output expectations, the CBI's latest survey showed firms now expect output to remain stable over the next four months.

The CBI's quarterly economic forecasts predict the economy will expand by 1.8% this year, with growth picking up to 2.7% in 2003. Interest rates are expected to be 4.25% by the end of the year, rising to 5% by the end of 2003.