Warring retailers provide bargains for shoppers at expense of margins and jobs

Ferocious competition on the high street is forcing hard-stretched retailers to offer cut-price bargains and shed jobs at the fastest rate in more than two decades, the CBI said yesterday.

The employers' organisation said 39% of retailers had shed jobs in the year to May while only 10% had seen jobs increase. The balance of -29%, the sharpest drop for 23 years, continued a two-year decline in retail employment, which had been the main engine for jobs growth over the past 10 years.

The willingness of retailers to cut their prices enabled sales to grow in the year to May, with 9% more retailers reporting an increase in sales than recorded a fall, the most positive balance since December 2004. But sales figures were still seen as low for the time of year, the CBI said.

"The growth in sales volumes today is still a world away from the rate we were seeing just a few years ago and retailers are still facing fierce price competition and tighter profit margins," said John Longworth, chairman of the CBI's distributive trades survey. "This pressure to discount coupled with the poor retail climate of the last year or so has forced retailers to lay off more staff.

"There is also no sign of a let-up in the relentless rise of energy, transport and other utility costs so retailers' profits will be seriously squeezed. Let's hope that retailers' cautious optimism becomes a reality with a successful World Cup stimulating demand."

World Cup preparations may already be having a positive effect on retail growth as the sales of durable household goods such as televisions and fridges increased for the first time since April 2002.

The outlook for consumer spending depended on strong links between the housing market and household spending, economists said, as incomes growth continues to be weak. "That link tends to derive from a boost in consumer confidence and/or an ability to finance spending through raising credit," said John Butler, economist at HSBC. "Neither channel, however, seems to be working at present."

The latest GfK survey showed consumer confidence deteriorated in May. The headline index slipped from -4 in April to -5, considerably worse than -1 in May last year. The most significant change was that fewer individuals intend to make a major purchase over the next 12 months.

"The easing back in consumer confidence in May reinforces concern over the future strength of consumer spending," said Howard Archer, economist at Global Insight. "Higher utility bills, growing speculation that interest rates could rise before the end of the year and the recent retreat in equity prices are likely to be weighing down on the consumer."

Household demand for credit also dropped in April, Bank of England data showed. Net consumer credit was just £800m, a level last seen in 1994, compared to a six-month average of £1.1bn.

"Consumers are cautious about taking on more debt," said Mr Archer. "Record high debt levels, rising unemployment and increasing pension concerns means that there is an increased need for many consumers to try and improve their balance sheets. This reinforces our belief that the upside for consumer spending will be limited for some time to come."

The Bank's cut in interest rates in August raised hopes of a recovery in consumer spending and the housing market, but expectations of a rate rise this year seemed to have dampened housing market sentiment, analysts said. The Bank's latest mortgage-lending data suggested a slowdown to the recovery in the housing market as the number of mortgage approvals for new house purchases fell from 114,000 in March to 106,000 in April, the lowest total since September 2005.

In addition Britain's traditionally strong property-buying season got off to a slow start as yesterday's Nationwide house price data showed subdued price rises of only 0.2% in the month to May, following a similar muted rise of 0.1% in April. RICS estate agents reported that new inquiries from potential buyers rose in April at the slowest pace in almost a year.

"The boost to confidence from the interest rate cut last August is fading, while affordability conditions for prospective buyers remain difficult," said Milan Khatri, economist at RICS.