British retail sales rose twice as fast as expected last month but government borrowing posted a record deficit for the month of July as tax receipts have collapsed due to the recession, official figures showed on Thursday. The Office for National Statistics said sales rose 0.4 percent in July, taking the annual rate to a gain of 3.3 percent - its highest since May 2008 - as furniture and electrical stores enjoyed a bumper month.
"The gains in retail sales give us greater confidence that GDP will rise in the third quarter, meaning that the UK exits recession," said James Knightley, an economist at ING. While consumer demand is holding up during Britain's worst recession in decades, government finances are not. Public sector net borrowing hit 8.016 billion pounds in July whereas analysts had predicted just 500 million pounds.
July is normally a surplus month but tax receipts have fallen more than 20 percent, with the unemployment rate hitting aa 13-year high of 7.8 percent Separate figures from the Bank of England underlined the problems facing British companies. Net lending to businesses fell for a third month in June, despite billions of pounds of taxpayer support for the banks. Lending was probably down again in July, the BoE said. But the jury is still out on whether the Bank of England will need to expand its quantitative easing programme - buying assets with new funds to pump money into the economy - beyond the 175 billion pounds currently earmarked.
A Reuters poll on Wednesday - after news that BoE Governor Mervyn King wanted to raise the asset-buying total to 200 billion pounds - showed a third of analysts predicted the central bank would expand the quantitative easing programme further. The Treasury took a sanguine view on the grim borrowing figures, saying they were broadly in line with forecasts made in the April budget and reflected the economy's exceptional weakness earlier this year.
"Today's public finance data reflects what we knew at the time and other figures have since confirmed. In the first half of the year the whole world was in a steep recession and that affected the public finances," a Treasury spokesman said. The public deficit for the fiscal year so far stood at just under 50 billion pounds, more than three times the level in April to July last year.
The government expects borrowing to reach 175 billion pounds this year. Analysts say this means some kind of fiscal consolidation is inevitable after the next election, expected in May 2010, whoever wins. For now, consumers seemed to be splashing out on household goods, which gained 4.5 percent on the month in July, their biggest rise since August 2006.
This cannot be because of a big recovery in the housing market. Other figures, from the Council of Mortgage Lenders, showed British gross mortgage lending fell 36 percent to an estimated 16 billion pounds in July from 24.9 billion pounds a year earlier.