EVIDENCE of slowing growth in retail sales and a jump in unemployment this week threatens to dampen the recent rally in the value of the pound.
Last week sterling surged to its highest level of the year against the world's major currencies, boosted by reports that the recession is over.
On Friday the pound closed at $1.6503. The euro was valued at 85.06p. Over the week, sterling was up 2
.8 per cent against the dollar and more than 2 per cent on the euro. The rise came on the back of growing confidence in the state of the UK economy. Last week influential think-tank the National Institute of Economic and Social Research estimated the UK economy grew in April and May.
Consumers were also cheered by signs of recovery in the housing market. The number of mortgages granted to buyers increased by 16 per cent in April compared with previous months, according to the latest figures released by lenders.
Gavin Friend, a currency strategist with nabCapital, said: "We have come through the political turmoil, and investors are able to concentrate more on economic fundamentals, which are moving further in favour of sterling."
But commentators are warning the UK economy is not yet out of the woods. On Thursday, the British Retail Consortium will report that sales growth has significantly dropped. It is set to reveal that sales only grew at a "significantly reduced" rate of 0.3 per cent month-on-month in May.
This is down from a rise of 0.9 per cent in April when retailers were boosted by the Easter break and good weather over the holiday period.
Dr Howard Archer, chief European and UK economist at IHS Global Insight, said: "Consumers remain under serious pressure from sharply higher and rising unemployment, markedly reduced earnings growth and heightened debt levels." Unemployment in May is expected to have hit 1.6 million, up 65,000 on April.
Archer warned: "Considerable uncertainties remain about the strength and sustainability of any recovery going forward, and the economy seems highly likely to shed jobs well into 2010."
On a brighter note, he said that purchasing power is being boosted by sharply reduced mortgage payments and moderating inflation.
More positive news could come from the Confederation of British Industry on Wednesday when it publishes its industrial trends survey for May. It is expected to show that manufacturing output rose by 0.2 per cent for the second month running.
Meanwhile, consumer price inflation is thought to have fallen to a 20-month low of 2 per cent in May – the latest figures are announced on Tuesday. This would take it back down to the Bank of England's target rate.
With doubts over whether the recession has ended, Scottish Widows is warning that British businesses are failing to protect themselves against ongoing threats in the economy. Its research, published today, has found that companies are "leaving themselves vulnerable to the unexpected".
It said that 81 per cent of businesses were dependent on one key employee whose loss from illness or death would seriously threaten the survival of their firm.
Richard Jones, protection market director at Scottish Widows, explained: "The current climate emphasises how crucial it is for businesses to improve their control over the future and security of their organisation."
