Retail recovery under way as consumers spend more and worry less

27/05/2014
Growth, driven by Bank of England policies, represents upbeat mood among public, which sees an end to financial squeeze
Retailers have not had it this good since Tony Blair was prime minister. Spending in shops, stores and online was almost 7% higher last month than it was in April 2013. That's the highest rate of growth since May 2004.
Back then, the strength of consumer demand was enough to spur the Bank of England into action. Official interest rates, which had begun the year at 3.75%, were raised from 4% to 4.25% in May 2004. There were two further quarter-point increases in June and August taking bank rate to 4.75%.

Expect something a tad more leisurely this time. The minutes of the Bank's monetary policy committee meeting held this month show that Threadneedle Street is edging closer to raising borrowing costs from their emergency level of 0.5%. Some of the nine members of the monetary policy committee believe the decision is becoming more balanced. This seems a statement of the obvious given that the economy is growing at an annual rate of 3% and London has a stonking great property bubble. Rates were cut to 0.5% during the emergency conditions of early 2009, when there were justifiable fears that the global economy was about to plunge into a second Great Depression. While it could be argued that the economy currently is enjoying a "sugar rush" as a result of the recovery in the housing market, it is in better shape than it was five years ago.
Retail sales are a sign of a more buoyant mood among consumers, who see an end coming to the squeeze on spending power and are much less fearful of losing their jobs than they were during the period of flatlining that followed the recession.
The Bank has helped create that mood in two ways. It introduced the Funding for Lending scheme in 2012, which was intended to give banks incentives to lend to businesses and households, but really worked by reviving the moribund mortgage market. And since last August, it has used forward guidance to reassure companies and individuals thinking of taking out loans that the MPC will not be trigger happy when it comes to raising borrowing costs. It is prepared to let the recovery run until all the spare capacity in the economy is used up, relying on customised measures to rein in the housing market. At some point, the message from the Bank will change. But not just yet.

By: theguardian.com

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