U.K. Retail Sales, Mortgages Drop as Recession Threat Looms

By Svenja O'Donnell and Brian Swint

July 29 (Bloomberg) -- A U.K. retail sales index dropped to a 25-year low in July and banks granted the fewest mortgages in at least nine years last month as the economy edged closer to a recession.

A gauge of retail sales showed a balance of minus 36, the lowest since the survey began in 1983, the Confederation of British Industry said today. Banks approved 36,000 loans for house purchase in June, the least since comparable data began nine years ago, the Bank of England said in a separate report.

``People will have to tighten their belts and will be doing so over a long period,'' said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. ``This is not going to be over anytime soon. We predict the U.K. will experience a recession in the second half of this year.''

The pound fell after the reports, which signal weakening consumer spending as the housing market slump deepens. That may add to dissatisfaction with Prime Minister Gordon Brown, whose ruling Labour Party had the lowest support since the early 1980s in a Populus Ltd. poll published today, after he lost three special elections for Parliament seats since May.

The British currency slipped as much as 0.3 percent against the euro after the release of the CBI report and traded at 79.06 pence as of 12:26 p.m. in London.

The CBI's survey of 82 retailers showed 25 percent sold more goods than a year earlier and 61 percent sold fewer, the nation's biggest business lobby said today. The net rounded balance dropped from minus 9 in June.

Woolworths Drop

Shares in Woolworths Group Plc, the U.K. discount retailer of goods from DVDs to candy, fell to a seven-year low today after it said sales declined in the first half.

``It is turning out to be a very grim summer for many retailers,'' said Andy Clarke, retail director at Wal-Mart Inc.'s Asda chain and chairman of the panel overseeing the CBI's survey. ``Pressure from higher fuel and food prices is prompting many people to rein in their spending.''

Britons, laden with 1.4 trillion ($2.8 trillion) of debt, are paring their spending. Retail sales dropped the most since 1986 last month. The Bank of England predicts that economic growth will be the weakest since the early 1990s and that inflation will accelerate to double its 2 percent target.

The popularity of Britain's governing Labour party has fallen to 27 percent, its lowest level since the early 1980s, as economic confidence crumbles, a Populus poll in the London-based Times newspaper showed today.

Subprime Losses

Banks have cut back on lending to shore up balance sheets after the collapse of the U.S. subprime mortgage market, which has cost more than $468 billion in losses and writedowns worldwide.

The value of net home loans fell to 3.1 billion pounds in June, the least since October 2000, the Bank of England said today. The value of all mortgages dropped to 16.8 billion pounds, the lowest amount since 2001.

The Monetary Policy Committee said at its July 10 decision that ``the housing market downturn had gathered momentum'' while ``the financial sector remained fragile,'' minutes of the meeting published on July 23 showed. The average cost of a home in England and Wales fell 4.4 percent from a year earlier in July and will drop further in coming months, Hometrack said yesterday.

``There's so much uncertainty about where prices are going, I think that's one reason why the level of transactions in the housing market is so low,'' former Bank of England Deputy Governor Rachel Lomax said in an interview on BBC Radio 4 today. She ended her five-year term last month.

The Bank of England has kept the benchmark interest rate unchanged at 5 percent for the past three months as policy makers struggle to control inflation while trying to steer the economy away from a recession. Policy makers will take their next decision on Aug. 7.

To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.