British retail sales fell in May, major lenders have slashed credit lines to firms and export demand slumped at its sharpest rate in more than a decade, taking the shine off recent optimism about economic recovery. There have been signs Britain could emerge from recession before any other big economy, with some forecasters saying the recession may even have ended this quarter - but policymakers are much more cautious and expect a sluggish return to growth.
As such, there has been speculation that the Bank of England could expand its 125 billion pounds ($205 billion) asset-buying programme. The Office for National Statistics said on Thursday retail sales fell 0.6 percent in May after a 0.9 percent rise in April and below forecasts for a reading of 0.4 percent growth. Sales were 1.6 percent lower than a year ago.
"The fundamental drivers of consumer spending including labour earnings and the saving ratio will continue to act as a headwind for household spending growth," said Amit Kara, economist at UBS. The BoE's Trends in Lending report, which takes data from the biggest banks, showed the biggest fall in lending to businesses since June 2000 - down 5.4 billion pounds in April.
"The various policy measures undertaken by both the Bank of England and the government to boost bank lending are still to feed through to have a major impact," said Howard Archer, an economist at Global Insight. "This is worrying for recovery prospects and further increases belief that the Bank of England will have to further extend its quantitative easing programme."
In the minutes to this month's interest rate meeting, BoE policymakers highlighted ongoing credit constraints as a key downside risk to recovery. The Confederation of British Industry said factory orders fell slightly more than expected in June, with the export orders balance falling to -52 this month from -46 in May - the lowest since October 1998.