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Bad economic news mounts in Britain

Jane Wardell
AP Business Writer

London — The bad news on the British economy mounted Thursday, with a warning that the country’s debt rating could be downgraded combining with weak housing market data to overshadow a surprise rise in retail sales.

While the monthly retail data suggests that consumer spending is holding up despite the recession, economists said that rising unemployment and the prospect of higher taxes to feed the hole in the public finances are likely to clip the wings of any recovery.

“It remains hard to see this strength lasting,” said Capital Economics economist Vicky Redwood of the Office for National Statistics report, which showed overall sales rising 0.9 percent and nonfood sales 1.5 percent in April. “And the news on the rest of the economy was much weaker.”

Redwood said that people may have been spending the boost to their real incomes from falling inflation and interest rates in recent months, but the boost to income growth from lower mortgage payments is fading while the drag from rising unemployment and pay freezes is building.

The sales data was countered by a report from the Council of Mortgage Lenders revealing that mortgage lending fell 9 percent over the same month, dampening hopes that the housing market was improving.

Underscoring the point, real estate investment trust British Land posted markdowns in property values as it unveiled a sharply wider full-year loss.

There was also grim news on the state of the public finances as credit ratings firm Standard & Poor’s said it had revised Britain’s outlook to negative from stable.

It was the first time since S&P started providing an outlook of the British public finances in the early 1980s that the country has been put on the negative list, and follows concerns voiced by the International Monetary Fund that the government’s medium-term fiscal strategy is not ambitious enough.

The steeper than expected rise in public sector net borrowing is a record for the month and more than four times higher than seen 12 months earlier, the Statistics Office said.

While S&P reaffirmed the country’s actual long-term credit rating at the ‘AAA’ and its short-term rating at ‘A-1+’, it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

In his budget last month, Treasury chief Alistair Darling predicted the country’s debt position, which aggregates borrowing through the years, is expected to rise to 59 percent of gross domestic product in 2009-10, rising to a peak of 79 percent in 2013-14. When the government came into office in 1997, it said one of its main economic policies was to keep debt around 40 percent

The S&P outlook revision does not trigger a formal reevaluation of Britain’s rating but does mean policymakers have to be aware that a downgrade may be forthcoming if the public finances are not put on the straight and narrow in the near future.

Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club said the S&P report puts pressure on Darling to come up with a credible plan for bringing the spiraling deficit under control once economic recovery gets underway.

“The public finances will continue to deteriorate for some time as the economy continues to shrink and unemployment increases,” he said. “There is now mounting pressure on the government to tighten fiscal policy further.”

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