Shop-till-you-drop boom threatens to bust at last

Enough is enough' - that's the verdict of Britain's retailers on the Bank of England's slow, steady tightening of interest rates.

The British Retail Consortium will announce tomorrow that sales growth in August was significantly slower than July's 1.8 per cent, offering fresh evidence that higher borrowing costs are starting to bite.

'Retailers want to see some sense of stability,' says David Southwell, spokesman for the BRC. 'We would like them to say to the consumer: "We now feel we have done the job; we don't foresee future movements".'

High streets were largely insulated from the post-dotcom downturn as the Bank of England cut interest rates to pump up consumer demand and keep the economy on track. But now it's payback time: borrowing costs are heading back to more normal levels, and retailers are worried that shoppers will start to tighten their belts. The long consumer boom could be finally coming to an end.

Retailers have already noticed shoppers skimping by buying budget models instead of top-of-the-range products and stocking up on one or two items of clothing instead of an armful. They were forced to offer deep discounts in this year's sales to shift summer stock - though that could partly be blamed on the dreary weather.

The BRC is worried that the Bank has gone too far. The consumer boom has already lost some of its oomph since the dizzy days of 2001 and 2002, when sales growth topped 6 per cent a year on the official scale. Last year that declined to a more measured 3.3 per cent. There was a renewed upturn earlier in the year, but on the government's measure, retail sales fell in July for the first time in 14 months.

'We feel that this is not about consumer demand any more - it's about controlling the housing market,' Southwell complains. 'The rises we've had so far have already spooked the horses.'

Retailers that have enjoyed boom years while consumers flashed their credit cards will inevitably feel cheated as the Bank seeks to rebalance the economy. But shops are not the only places where rising interest rates are causing frayed nerves. Hard-pressed manufacturers are also demanding a moratorium on rises to help offset higher fuel bills, which are squeezing margins.

While the housing market captures most attention, the industrial sector is struggling to build on a recovery that has quietly been under way since last year.

In the second quarter of 2004 manufacturing output rose by a healthy 0.9 per cent; but fears are mounting that the recent surge in oil prices could dampen demand in the global economy, hurting Britain's exporters. 'The prospects for the global economy aren't as good as they were three months ago,' says Doug Godden, head of economic analysis at the Confederation of British Industry.

Alan Greenspan, chairman of the US Federal Reserve, suggested earlier in the year that the world's biggest economy was going through a 'soft spot', and economists are busy downgrading their forecasts for how fast the US can grow for the rest of the year.

In the UK, forward-looking business surveys have given mixed signals about confidence. But oil prices are still well above last year's levels, electricity bills are also heading upwards, and firms feel another rise in rates is the last thing they need. Godden believes it's time for a pause: 'We are seeing clear evidence of a moderation in consumer spending. For the time being, we think interest rates should be put on hold.'

Rate increases are hard to swallow when they come at the same time as other rises in costs. As firms negotiate their annual electricity contracts, David Porter, chief executive of the Association of Electricity Producers, says it's almost inevitable that bills will rise. There is upward pressure on natural gas prices, and generators face the costs of fulfilling new environmental regulations.

'We are going to have to get used to energy being more expensive - and it's going to show up more because we have gone through about 10 years of very competitive energy prices,' he warns.

In the short term, energy price rises tend to be inflationary but in the longer term their effect tends to depress industrial activity and consumer spending. In fact, if the oil price rise is sustained, it may do some of the Bank's work for it. Nationwide said last week that higher energy bills would take as much out of household coffers as a quarter-point rate rise - so one way or another, a period of belt-tightening looks inevitable.