Retailers press for lower rates

Labour's third-term stewardship of the economy got off to the worst possible start today with news of a spring slump in consumer spending and evidence of the steepest drop in factory output for three years.

Retailers called on the Bank of England, which left interest rates on hold at 4.75% for the ninth month in a row yesterday, to lift the high-street gloom by cutting borrowing costs.

The British Retail Consortium said an early Easter was only partly to blame for a 4.7% drop in sales compared with last year's figures and reported that business was bad "across the board". Big-ticket items such as fridges, washing machines and furniture suffered particularly badly.

"A slowing housing market, pre-election economic uncertainty and the continuing threat of interest rate rises dominated consumer confidence in April. With figures like these, it is crucial that the Bank of England consider a gradual reduction in interest rates - another increase is the last thing retailers and consumers need," it said.

City analysts had already concluded that there was no prospect of the Bank tightening interest rates ahead of the start last Friday of the meeting of the nine-strong monetary policy committee.

Recent downbeat economic news was supplemented by the April BRC data - the worst since the report was launched in 1995 - and the March figures for manufacturing output from the Office for National Statistics, published yesterday.

According to the ONS, output from British factories was down by 1.6% in March, leaving production lower than it was when Labour first came to power in May 1997.

Apart from June 2002 - when the pattern of production was greatly distorted by the Queen's golden jubilee - it was the steepest decline since January 1995, officials said.

Manufacturing output in the three months to March, considered a better guide to the underlying trend, was down by 0.7%. The ONS said it was enough to knock more than 0.1 percentage points off growth in the first quarter of 2005, originally estimated at 0.6%.

Ross Walker, an economist at the Royal Bank of Scotland, said: "The much weaker than expected data in March suggest a downward revision to [gross domestic product] in [the first quarter] to 0.5% from 0.6%, making it far harder for the economy to match last year's 3.1% pace of expansion."

In the budget in March, the chancellor said he expected the British economy to grow from 3% to 3.5% this year.

A Treasury spokesman said all was not doom and gloom for manufacturing. "Output grew by 1.4% last year, and recent survey data suggests continued growth in 2005."

Stephen O'Brien, the shadow industry secretary, said: "This fall in manufacturing output is further proof of Labour's failed business policies. After eight years, a million jobs have now been lost in the sector."

The Bank gave no reasons for its rate decision but will give its latest assessment of the economy in its quarterly inflation report tomorrow.

Analysts said the MPC faced a dilemma, with Britain caught between declining activity and rising prices.

The April figures for producer prices, also published yesterday, showed the rapid increase in manufacturers' fuel and raw material costs feeding through into the price of goods leaving factory gates.

With dearer oil raising input costs by more than 10%, manufacturers passed on increases to customers. Output prices rose by 0.7% in April, pushing up the annual rate of increase from 2.8% to 3.2%.