Surprisingly strong retail sales and budget deficit reduction give hope for British economy

UK economy shows signs of strength

LONDON — Surprisingly strong British retail sales and a further reduction in Britain’s big budget deficit last month are giving rise to hope that the country’s sputtering economy can maintain growth into the second half of the year.

But economists cautioned against reading too much into one set of figures on Thursday, warning there was still a long way to go to ensure Britain’s recovery from a deep recession.

The Office for National Statistics reported that retail sales volumes rose 1.1 percent in July, the strongest gain since February and well above the average 0.4 percent forecast by economists. Over the year, sales rose 1.3 percent.

The statistics office also revealed that net public sector borrowing for the month was 3.17 billion pounds, compared with 5.52 billion pounds a year ago, putting the government on track for forecast reductions in the budget deficit.

There have been growing fears in recent weeks that Britain’s recovery from an 18-month recession is running out steam.

Bank of England Governor Mervyn King warned last week that the country faces a “choppy recovery” amid great uncertainty about the outlook for the United States and the eurozone as the central bank lowered its economic growth forecast for next year.

The bank now expects gross domestic product to grow about 2.5 percent next year — down from its forecast in May of 3.4 percent.

The July sales data provided a bright spark amid weakening consumer confidence, the persistence of tight credit conditions and faster fiscal consolidation via large government spending cuts. There was also good news from a Confederation of British Industry report showing that manufacturing industry confidence had improved to its best level since August 2008.

But a combination of weak earnings growth and high inflation — currently running at 3.1 percent, well above the government’s 2 percent target — is squeezing real incomes as unemployment remains high.

In other July data out Thursday, the Society of Motor Traders reported that car production fell heavily, dropping 8.9 percent on the same month last year. Mortgage lending rose to its highest level for a year, but that was still down 4 percent on a yearly basis and the Council of Mortgage Lenders warned that levels were likely to remain subdued for the rest of 2010, supporting recent surveys showing fewer buyers in the market.

“The housing market, the fortunes of which tend to be tied closely to those of the retail sector, appears to be heading for a double dip,” said Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club economic consultancy. “The outlook for consumers remains very challenging and with this backdrop it looks unlikely that retailers will continue to enjoy the rates of growth they have over the past couple of months. We would expect sales to be more muted over the rest of the year.”

Similarly, the drop in public sector borrowing, which brought borrowing for the four months of the financial year so far to 44.9 billion pounds, was welcomed with caution.

The figures in July have traditionally been a surplus, boosted by corporation tax and sales tax receipts due at that time, but the recession last year forced the government to borrow for the first time in 13 years.

In an emergency budget in June, Treasury chief George Osborne ordered government departments to prepare for budget cuts of 25 percent to raise 30 billion pounds per year ($44 billion) in expenditure savings and announced a two-year pay freeze for most public-sector staff.

An initial 6 billion pounds (US$9.4 billion) of spending cuts, which include axing new playgrounds and library books, and payments to pregnant women, have been unveiled.