Author Archive

Business  |  UK

Official data on Thursday showed retail sales volumes including automotive fuel rose 0.3 percent in April, slightly better than analysts' forecasts of a 0.2 percent rise, after an upwardly revised increase of 0.5 percent in March.

On the year, sales rose 1.8 percent in April, unchanged from March's pace and in line with forecasts.

The figures suggest that consumer demand held up well as Britain recovers from its deepest recession since World War Two, despite high unemployment and uncertainty throughout the month about the outcome of the May 6 national election.

"Overall, sales volumes are grinding up slowly, which given the rise in VAT, the strength of fuel prices and the general election, isn't a bad result all things considered," said Philip Shaw, economist at Investec.

But some analysts doubted if sales growth would be sustained later in the year when the new Conservative and Liberal Democrat government starts cutting spending and raising taxes to rein in record public borrowing.

"With debt-laden households being squeezed by falling real wages, and a major fiscal tightening on the way -- probably including a further rise in VAT -- the outlook for consumers, and hence retailers, remains far from rosy," said Jonathan Loynes of Capital Economics.

Value-added tax returned to 17.5 percent in January after a 13-month reduction to 15 percent, and many economists expect finance minister George Osborne will raise it to 20 percent in an emergency budget on June 22.

"We expect the VAT hike to come in some time in the Autumn, so that will probably tend to accentuate the deteriorating volumes/price split we are seeing at the moment," said Ross Walker, economist at RBS.

Consumer price pressures were already clear in April's figures, echoing a rise in April's consumer price index to 3.7 percent, and suggesting that retailers are focussing on repairing margins after the 18-month downturn.

The retail sales deflator, a measure of inflation, rose to 2.8 percent on the year from 2.5 percent in March, with the deflator for the clothing sector rising to its highest since September 1998, at -0.3 percent on the year.

But the figures did little to alter the view the Bank of England will keep interest rates at a record low 0.5 percent until the end of this year at least to shield the economic recovery from the downward impact of any fiscal tightening.

MIXED FORTUNES

Thursday's figures were mixed: strength in clothing, textiles and footwear -- which accounts for 12 percent of total sales -- and department stores offset static food sales and weakness in the household goods and mail-order sectors.

That chimed with recent corporate results from retailers, who have said they are bracing for tough conditions ahead.

Department store chain John Lewis, whose weekly sales figures are viewed as a barometer of consumer demand, recorded strong gains throughout April and the first part of May.

By contrast, supermarket chain Asda posted its first quarterly drop in sales in four years in the first quarter.

Excluding fuel, retail sales rose 0.1 percent on the month and were up 3.0 percent on the year. Fuel sales rose 1.5 percent on the month after a 2.6 percent increase in March.

Still, analysts were confident that retail sales would at least support economic growth in the second quarter, after a lacklustre 0.2 percent expansion in the three months to March.

"This is no guarantee that overall consumption for the current quarter will show the same trend. But the April retail sales release adds to the sense that growth in general is set to accelerate in Q2 after a setback at the start of the year," said Allan Monks, economist at JP Morgan.

(Reporting by Fiona Shaikh and David Milliken; Editing by Ruth Pitchford and Toby Chopra)

Business

By contrast, the U.S. housing market, another pillar of the economy, is looking shaky after the expiration at the end of April of a home buyer's tax credit.

Jobs were key to consumers recovering their nerve. A Conference Board report on Tuesday said fewer of those surveyed found jobs "hard to get." Consumers account for more than two-thirds of U.S. economic growth.

After more than 8 million jobs were shed in a long-running economic downturn, U.S. payrolls grew for four straight months including April.

"It appears that consumers are focussing on the improvement in the labour market as an indication that things are getting better," said Tom Simons, money market economist with Jefferies & Co in New York.

U.S. consumer confidence rose for the third-straight month in May, to 63.3, from a downwardly revised 57.7 in April.

The median of forecasts from analysts polled by Reuters was for a reading of 59.0 in May.

The optimism of the U.S. consumer contrasts with recent signs of consumer demand in Europe, which have been mixed.

Financial markets mostly ignored the data and worried about Europe's public debt crisis. Prices of U.S. Treasury bonds rose. Major stock indexes lost about 2 percent but rallied late in the session to end little changed for the day.

The May consumer confidence survey results showed Americans were little affected by the euro zone debt crisis or the resulting sharp sell-off in U.S. stocks earlier this month.

"Apparently they're not paying too much attention to what's going on in Europe," Simons said.

"Given what's going on, the fact that confidence is continuing to improve shows that the U.S. consumer is very provincial and not sort of globally minded as to how they think the developments in Europe will affect corporations in the United States and their ability to hire workers," he said.

The Dow Jones industrial average .DJI on May 6 briefly fell nearly 1,000 points -- its biggest-ever intraday point drop. The Conference Board survey's cut-off date for the latest survey was May 18, and it is unclear how consumers responded to the latest leg down in markets.

HOUSING HITTING FLOOR?

Housing, a cornerstone of the U.S. economy that crumbled in the credit crisis and contributed to the most protracted recession in decades, is still rickety, data showed.

"Most forecasters think it is a floor, and they think we'll be bouncing around it this year maybe, but then it's going to start going up, but not everyone agrees on that," Robert Shiller, an economist and co-founder of the S&P/Case-Shiller Home Price Index, told Reuters Insider on Tuesday.

Single-family home prices in 20 major cities were unchanged in March from February, but fell in the first quarter on renewed price pressure as sellers and buyers braced for a tax credit to expire on April 30, Standard & Poor's/Case Shiller home price indexes showed on Tuesday.

Prices have rebounded from lows hit during the crisis, yet the end of tax incentives for home buyers, combined with mounting foreclosures, suggest more weakness, S&P said.

For the first three months of the year, S&P's national home price index fell 3.2 percent, unadjusted, compared with a 1 percent drop in the fourth quarter.

But Californian cities, among the hardest hit by the credit crunch, posted gains.

Yet the performance of the domestic economy is not the only concern for the United States, given the danger that economic weakness or a surge in government debt yields could become a global phenomenon, analysts worry.

A worst-case scenario for the United States would be cascading sovereign debt defaults that spread into larger European economies.

Banks could clamp down on lending to protect their capital base. Goldman Sachs has estimated a "severe" credit crunch would take about 1.5 percentage points off of U.S. economic growth, potentially triggering a double-dip recession.

U.S. bank exposure to the entire euro area is estimated at $1 trillion.

After the worst recession in 70 years, the health of the economy is a key issue for American voters in the November congressional elections that are expected to be rough on many incumbent politicians.

(Reporting by Lynn Adler, Emily Flitter, Emily Kaiser, Caroline Valetkevitch and Wanfeng Zhou; Writing by John Parry; Editing by Kenneth Barry)

Business

Amadeu Altafaj, a spokesman for the European Commission, said the report in the Spanish newspaper El Economista was "very bizarre" and added: "I can firmly deny it."

An IMF spokeswoman said it was "totally unfounded."

But market worries about Spain's debt position continued to simmer, with the yield spread on Spanish/German 10-year bonds rising to a euro lifetime high of 223 basis points.

"The noise surrounding some form of backstop facility for Spain has increased dramatically," said Silvio Peruzzo, an economist at RBS in London.

A 440 billion euro ($543 billion) special-purpose vehicle (SPV) is already in place for any euro zone country that runs into Greek-style payment problems, finalised earlier this month by ministers from the 16 countries that use the single currency.

The newspaper report, citing sources "close to the issuing entity," said a liquidity plan specifically aimed at Spain had been discussed by IMF board directors and was aimed at staving off a rescue similar to that offered to debt-laden Greece.

A Spanish government spokesman said Tuesday that talks between the Spanish prime minister and International Monetary Fund chief Dominique Strauss-Kahn set for Friday were unconnected with media reports that Madrid might seek a Greek-style bailout.

INVESTOR CONCERNS

On the sidelines of a conference appearance in Paris, Strauss-Kahn brushed off questions about the newspaper report.

"I'm in France. Are there rumours about an aid to France? I'm going to Italy tomorrow. Are there rumours about aid to Italy? I'll be in Brussels in a week. Are there rumours about aid to Belgium?" he said.

The El Economista report was published one day before leaders from the wider, 27-country European Union meet to discuss ways to strengthen cooperation on economic policy.

Backed by guarantees implicit in the SPV, Spain has continued to sell its debt on financial markets, with the yields investors charge it up around 1 percentage point in the past month but still well below those that drove Greece to seek aid from the EU and IMF.

Spain sold 12-month bills Tuesday at an average yield of 2.303 percent, compared to 1.59 percent in the same auction in May, while the 18-month bill gave 2.837 percent, up from 1.951 percent.

But investor concerns have persisted, focussed on government efforts to push through radical labour reforms -- on which Spain's cabinet Wednesday passed a decree -- while unemployment stands at more than 20 percent, and slash a budget deficit running at close to 11 percent of GDP.

(Reporting by Dale Hudson in Brussels, Elizabeth O'Leary in Madrid and Brian Love in Paris; writing by John Stonestreet; editing by Adrian Wright)