Exports falling as high street booms

Further evidence emerged yesterday of Britain's two-tier economy. Official data showed consumer spending was booming, but the sky-high pound is making it increasingly difficult for the country's exporters to compete in overseas markets and export orders have fallen to their lowest level since 1992.

The economy grew by an annualised 3.4 per cent in the second quarter of the year, boosted by consumer spending at a nine-year high, figures from the Office of National Statistics showed. Gross domestic product grew at an unrevised 0.9 per cent from the previous quarter, while consumer expenditure grew 1.5 per cent, the highest quarterly rate since the 2.4 per cent recorded in the third quarter of 1988.

Despite the high street boom, the Confederation of British Industry (CBI) warned yesterday growth would slow in 1998 from this year's forecast 3.1 per cent to 2.5 per cent as export growth continued to be hit by the strong pound and consumer demand came off the boil.

Concern about a widening of the trade gap, which would increase selling pressure on the pound to fund higher imports, sent sterling sharply lower yesterday. The pound closed in London at 2.93 German marks, well down on its recent high of DM3.07, and traders were predicting a retreat to DM2.88 over the next few days. "A mountain of sterling has been sold today," said Nick Probert, head of spot trading at Bank of America.

Assuming base rates are held at 7 per cent until the end of 1998 though, the CBI expects the pound's trade-weighted index to fall to 99.0 by the end of next year from 102.6 at present.

"People are worried about what the high pound levels are doing to exports. What we saw today was a shake-out in response," Peter Wood, forex dealer at Bank of Boston, said.

The CBI report showed UK export orders, choked by the high-flying British currency, had reached the lowest levels in five years.

Forty-eight per cent of manufacturers said export order books were below normal while 11 per cent said they were above average - leaving a negative balance of 37 per cent, up from 29 in July.

Sudhir Junankar, the CBI's associate director of economic analysis, said rocketing high street spending was due in large part to the flood of windfall payments from building societies converting to banks. In keeping with other forecasts this week, he estimated the boom would be short-lived.

The strong growth of the domestic market is in marked contrast to the export sector, which has been crushed by a 22 per cent rise in the trade- weighted value of the pound this year. The twin track nature of the economy was underlined by official growth figures showing the manufacturing sector expanding at just 1.6 per cent year-on-year compared with the 4.3 per cent enjoyed by the service sector.

The CBI quarterly trends survey showed export orders at their lowest level since November 1992, shortly after the pound was forced out of the exchange rate mechanism. Geoffrey Dicks, UK economist at NatWest Markets, said the split in the economy was now gaping.

The good news from yesterday's figures was that strong high street spending did not appear to be having any effect on inflation. The CBI said manufacturers' expectations of passing on higher prices were at their lowest levels for years.

The CBI forecast underlying inflation, excluding mortgage payments and indirect taxes, would be 2.3 per cent by the end of the year but it expects it to have risen to 2.7 per cent, above the Government's 2.5 per cent target, by the end of 1998.

Despite that, the CBI called for the Bank of England to leave interest rates at 7 per cent until the end of next year.