Good news from the high street is lost in the market frenzy

AS CHAOS erupted on the foreign exchanges yesterday and UK interest rates soared, a signal that consumer confidence in Britain might have been on the upswing last month went unnoticed in the frenzied financial markets.

Official figures showed an 0.8 per cent rise in UK retail sales during August, better than City economists were forecasting after July's 0.5 per cent fall.

Sales of clothes, footwear and household goods showed strong increases, helped by widespread end-of-summer price discounting.

On any other day such figures would probably have been welcomed with a small stock-market rally because they signalled increased consumer spending, crucial to economic recovery.

But yesterday they were rapidly overtaken by the dramatic events unfolding hourly on the financial markets.

The two-point increase in the minimum lending rate means that if a mortgage rate rise follows, any emerging consumer confidence is likely to be shattered.

Gwyn Hacche, economist with the stockbrokers James Capel, said: 'The interest rate hike is going to knock any consumer spending revival for the rest of the year if it is sustained.'

The British Retailers Consortium said the increase in interest rates was a blow to all retailers after the August sales data had shown improved confidence in the high street.

Allan Sayers, chief executive of the 3,000-member British Shops and Stores Association, said: 'These massive increases will squeeze retailers in a pincer movement. The direct effect is that they will have to pay more to borrow . . . Indirectly there are going to be significantly fewer customers.'

The monthly, seasonally adjusted retail sales data have been an important barometer of consumer confidence during the recession, but have shown little change over the past quarter.

However, for the three months of June, July and August, retail sales rose 0.5 per cent from the previous three months, the Central Statistical Office said. Non-food retailers saw a 1.1 per cent increase in sales volumes. Clothing and footwear sales rose 2 per cent, and household goods and other non-food items were up 1 per cent.

Only food retailers reported a fall in sales, of 0.2 per cent, for the three- month period.

Ian Shepherdson, UK economist with Midland Montagu, said increased August sales were due to heavy price discounting before the new season's merchandise came in. A brief pick-up in house sales this summer because of the end of the stamp duty moratorium might have led to higher sales of household items.

But Mr Shepherdson doubted whether retail sales could continue at these levels in September, particularly if lending rates stayed high.

UK public sector borrowing statistics were also released yesterday, showing the public sector finances were in deficit by pounds 2.9bn, below market expectations of a pounds 3.4bn deficit.

Government receipts of income and corporation tax remained low in August, as the recession continued to hold back company and personal earnings.