Has the World Cup effect really saved the retail sector?

Has the World Cup saved the high street? It's certainly made a difference, with retail sales boosted by demand for flat-screen TVs in the run-up to the tournament. So is it time to buy back into the sector?

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Has the World Cup effect saved the high street after all?

It certainly seems like it has made a difference, at least. Comet owner Kesa Electricals saw sales jump 11.3% in its first-half. Like-for-like sales that is, excluding new or refurbished stores - at Comet rose 8.6% in the six months to July 18th. Sales were boosted mainly by strong demand for flat-screen TVs in the run-up to the football tournament.

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Meanwhile, official statistics showed that retail sales rose for the fifth month in a row between May and June. For the three months from April to June sales were 2.1% ahead of the previous quarter. That's the highest quarterly growth rate since February 2004.

So is this a cue to buy back into the retail sector?

We're far from convinced that the apparent revival in the retail sector can be sustained. The main concern we have is how are consumers paying for it all?

According to the British Bankers' Association, UK consumers actually repaid a net £0.7bn on their credit cards during the first half of 2006. Net repayments were made in four of the past six months. Last year they borrowed a total of £1.1bn over the same period.

Meanwhile, personal loans and overdrafts are seeing fairly muted rises last month consumers borrowed £189m in personal loans and overdrafts, compared to £669m in May.

So where's all the money for those flat-screen TVs coming from? Look no further than the housing bubble. Net mortgage lending came to £5.6bn in June, and is up 18% on last year for the first half as a whole. The exact breakdown of the data is not available until later in the month, but generally remortgaging and equity withdrawal accounts for roughly half of new loans.

So the fall in credit card lending isn't, unfortunately, down to people tightening their belts. They've just switched funding sources from their plastic cards to their mortgages.

There are several drivers behind this move to putting it on the house'. One is that finance companies are tightening lending criteria on unsecured forms of lending, such as credit cards and personal loans. That means the indebted are forced to turn to secured lending as the only option open to them.

Another is that sheer levels of indebtedness mean that people are being forced to extend their debts over longer periods of time in order to shrink their monthly payments.

This trend has become particularly pronounced as most lenders have now stopped offering 0% interest rates on credit cards. Consumers are suddenly finding that debts which have been shifted from interest-free card to interest-free card over a period of years in some cases, are suddenly starting to accumulate interest.

Unable to afford the monthly payments, such borrowers take out 'consolidation' loans. These are loans secured against their homes, which are then used to pay off the short-term debts. In the long term of course, it means paying far more interest on the debt - not to mention the risk of losing your home.

And with interest rates threatening to move higher in the coming months, lenders may well start to become more picky about unsecured lending too. Sub-prime lender Kensington Mortgages is already becoming more cautious. In its most recent results it admitted that it has deliberately accelerated the process of repossessing homes from defaulting clients.

Perhaps retailers would look like a good bet if the economic environment looked set to improve any time soon. But the pressure on household finances seems sure to continue for the foreseeable future.

Gordon Brown is coming under increasing pressure to push up taxes. UK public finances had their worst June ever last month, with Government borrowing rising to £7.3bn from £6.2bn the year before much worse than the £6.5bn expected by analysts.

Mr Brown has now spent £16.4bn this year. That's nearly halfway to the £36bn he plans to borrow between now and next April and we're only three months into the current financial year.

And as if higher taxes, soaring energy bills and huge mortgage debt were not enough, retailers themselves are putting pressure on consumers.

As Robert Cole pointed out in The Times earlier this week, shops are no longer content to keep slashing prices in the face of falling profit margins - and they are having less trouble pushing through price rises.

Commenting on this week's above-forecast inflation figures, he said: "Across the board, there are signs that businesses see the time is right to push through those relieving price increases they have wanted to make for months, while people understand that energy costs are rising. Price rises are more acceptable."

That might be good for retailers in the short term. But in the longer term, higher prices will just leave the UK consumer even more overstretched. And that means competition on the high street for the few pounds of disposable income left over will become even more brutal.

Suffice to say, we're not scouring the sector for bargains just yet.

Turning to the wider markets...

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The FTSE 100 fell 7 points to close at 5770, losing some of the gains made on Wednesday. The biggest risers were Tate & Lyle and Capita, the company which runs the the London congestion charge, who rose 9% to 518.75p after posting a better-than-expected 24% rise in interim profits. Vodafone fell after shareholders were advised by Pensions and Investment Research Consultants to vote against its renumeration report at the company's AGM next week. For a full market report, see: London market close

Over in continental Europe, the Paris CAC-40 index closed 18 points lower at 4,865, falling from an intra-day high following the early losses on Wall Street. The German DAX rose 6 points to 5,545.

Wall Street fell steadily from around midday on concerns over higher oil prices and mixed earnings, with tech stocks bearing the brunt. The tech-heavy Nasdaq closed down 41 points at 2,039, whilst the Dow Jones fell 83 to 10,928.

US losses weighed on Asian markets, which also saw mining stocks suffer big losses in response to falling metal prices. The Nikkei 225 closed down 125 to 14,821.

Oil prices fell slightly, with crude trading at $74.14 a barrel in New York, and Brent crude at $73.17.

Spot gold fell sharply, down almost 2% to $632 in New York. However, the price remained above Wednesday's two-week low of $617.95.

And London-based HSBC this morning agreed to buy Panama's largest bank, Grupo Banisto SA, for $1.77bn in cash, in line with its shifting focus towards emerging markets. The deal will give the bank access to five new countries in the fast-growing South American market.

And our two recommended articles for today...

What investors need to know about China

- Daunted by its size and the sheer scale of China's economic growth, Westerners can ignore what is happening at a local and regional level. But, says Stephen Roach, understanding the contradictions between macro and micro, and how the People's Republic is coping with the transition to a marketised economy, is absolutely essential to predicting what will happen next for China. To find out why China defies generalisations see: What investors need to know about China

Why gold is a good long term investment

- We are witnessing a major investment phenomenon, says RH Asset Management. The gold price has already recovered half of its sharp losses from last year, and could be heading for $1000/oz. So gold is definitely worth holding on to for the time being. But when will you know that it's time to sell? For the top signs to look out for, read: Why gold is a good long term investment

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.