History > 2006 > UK > Economy (III)

Millions to benefit

from minimum wage hike

Friday September 29, 2006
Guardian Unlimited
Hilary Osborne

An estimated 1.3 million workers will benefit from an increase in the national minimum wage coming into affect this Sunday, the government said today.

The rise, announced in March this year, increases the minimum amount employers can pay adult workers from £5.05 to £5.35 an hour.

The minimum rate for workers aged between 18 and 21 will increase by 20p to £4.45, and for 16-17-year-olds it will go up by 30p to £3.30.

The minimum wage has been increased annually since Labour introduced it in 1999. At the time it was worth £3.00 an hour to workers under 21 years of age and £3.60 to other workers.

The separate band for 16-17 year olds was added in 2004.

The secretary of state for trade and industry, Alistair Darling, said: "Before the national minimum wage was introduced, wages of as little as £1.20 per hour were common and legal.

"Since its introduction, our economy has seen the longest ever period of sustained growth and it is only right that we continue to help those who get paid the least."

The 5.9% increase follows a recommendation from the government's Low Pay Commission.

It has been recommending above average rises since 2002 in a bid to increase the number of workers who will benefit.

As a result, between 2002 and 2006 the adult minimum wage has increased by 27.4%, while average earnings have increased by around 17%. Employers' groups are calling for a smaller rise in 2007.

The CBI and the British Chamber of Commerce (BCC) both said their members needed time to absorb this latest round of increases before another above-average rise was imposed.

David Frost, director general of the BCC, said: "Businesses cannot continue to absorb minimum wage rises that are in excess of average earnings growth in the UK.

"What we do not want to see is wage pressures becoming the tipping point over which firms have to reduce staffing, cut back on investment and be unable to grow.

"Future rises may have to be no more than the increase in average earnings to correct some of the adverse effects of recent increases."

Earlier this week, the CBI claimed the minimum wage was fuelling the black economy in the UK and said business risked being undercut by unscrupulous employers who hired workers unofficially.

Instead of using this as an argument against further increases in the minimum threshold, the TUC suggested the CBI should back its calls for tougher enforcement of the law.

Meanwhile, experts have suggested that new legislation to outlaw age discrimination could lead to claims against the government by workers not entitled to the full adult minimum wage.

Rachel Krys of the Employers Forum on Age said that because the minimum wage and modern apprenticeships were statutory schemes, they were exempt from the laws which will stop employers treating people differently due to their date of birth.

However, she added: "This doesn't preclude somebody taking the government to the European court and I would be very surprised if that didn't happen."

Millions to benefit from minimum wage hike, G, 29.9.2006, http://money.guardian.co.uk/pay/story/0,,1884237,00.html

Britain becomes 'never, never land'

as personal debt runs out of control

UK borrowers account for one third of unsecured debt
in western Europe

On average, a Briton has twice the debt of a European
Total consumer debt in the UK is at a record £1.3 trillion
New debt last year came to an unprecedented £215bn
Citizens Advice faced 1.25 million new debt cases last year - the figure is rising

Published: 28 September 2006
The Independent
By David Prosser, Personal Finance Editor

Britain's "buy now, pay later" consumer culture has led to unprecedented levels of personal debt. The average Briton now has more than twice as much unsecured borrowing - including overdrafts, personal loans and credit card debt - as the typical European, according to a report published by Datamonitor.

The market research analysts said yesterday that even before mortgage borrowing was considered, the average Briton owes £3,175, compared to the average debt in Europe of £1,588. Datamonitor said Britons had "an insatiable appetite for credit", taking on new unsecured loans of £215bn last year alone.

Borrowers from the UK now account for a third of all unsecured debt in western Europe, Datamonitor added. Paul Marsh, author of the report, said: "While the UK enjoys a buy-now pay-later culture ... many major European countries have a culture of saving and frugality. Countries such as France and Germany are particularly debt adverse."

The boom in unsecured lending has boosted total consumer debt, including mortgages, to almost £1.3trn, close to three times the level of borrowing in 1997, when Labour came to power.

The consumer borrowing crisis is set to become the most pressing concern for Gordon Brown's successor as Chancellor of the Exchequer. George Osborne, the shadow Chancellor, said: "Gordon Brown is presiding over an economy increasingly built on debt. This has left many families vulnerable to the triple blow of rising mortgage rates, taxes and energy bills."

The debt crisis is even hitting young borrowers, according to separate research published yesterday by One Advice, the debt advisers. The company said the average 18 to 24-year-old now owes £2,860 in unsecured borrowing. One Advice said the average figures obscured worrying individual cases. It said 108,000 18 to 24-year-olds had credit card debts of more than £5,000.

There are increasingly worrying signs that many borrowers are struggling to stay on top of repayments. The average person has debts that total 150 per cent of their annual income, according to the Bank of England, half as much again as in 1997.

The Bank believes around one million households face problems coping with debt repayments - around 10 per cent of the four in 10 households that have unsecured borrowing.

A report from Citizens Advice earlier this month said 770,000 mortgage borrowers had missed at least one mortgage repayment over the past year, while two million homeowners said they were concerned their finances would not stretch to cover their debts.

The charity said younger people were particularly vulnerable, with mortgage-holders aged 21 to 24 the most likely to default.

The latest figures from the Government's Insolvency Service, published last month, have also unnerved debt campaigners. The numbers becoming insolvent in the second quarter of the year reached 26,000, a 66 per cent rise on the same period in 2005.

Borrowing difficulties have already begun to affect the housing market. Britain's housing boom has saddled newer homeowners with far larger mortgages. Figures from the Hay Group consultancy , published yesterday, showed the typical borrower now spends 51 per cent of monthly pay on mortgage repayments.

The Council of Mortgage Lenders said the number of homes repossessed in the first half of the year was 8,140, the most for more than five years.

At the same time, there is evidence that Britain's biggest banks, which have all reported a rise in bad debt in recent months, are cracking down on consumer credit. Two weeks ago, for example, HSBC said it would introduce annual reviews of all its customers' overdrafts, with cuts to many borrowers' overdraft limits likely to follow.

Alice Douglas, 42, writer: 'We were happy with a £60 TV. Now we spend £1,500'

"Seven years ago, I moved to Wales for a change of lifestyle," says Alice Douglas, 42, a writer from Snowdonia. "I bought a 4,000 sq ft church for £54,000, which was incredibly cheap, because it needed renovation work, but I had never done a big building project before. I thought I'd be able to do the structural work for £80,000 but I've had to spend £300,000. I didn't think of the cost, and even things like floor tiles for the kitchen ended up costing £5,000 because they were limestone, and I spent £25,000 on windows.

"I used every credit card I could get. At one point, I had 10 different credit cards with £8,000 on most of them, so that my debt was up to £60,000. It was all about to collapse until my mortgage company valued my property, which has massively increased in price.

"I still have about £30,000 on my credit cards, but I've just learned to juggle them. Once you've got them, there's too much temptation and you get used to a lifestyle where you want to have lots of things. We used to be happy with a £60 television set, but now we spend £1,500 on a 38-inch LCD.

"You get sucked into it, and get used to spending large amounts without thinking about it, because it's on a card. It does make a different because it doesn't feel like real money. If it did feel real, it would feel obscene. I went to London recently and spent £3,000 in Whistles, on clothes. I'm about to buy another property with an 85 per cent mortgage and I'll get the deposit on credit card.

"It's a gamble but it could pay off. If you're shrewd, you can use it to your advantage. My credit rating is very good because I borrow a lot but I'm able to make my payments. It used to stress me out but now I think, if I lose everything, it wouldn't be the end of the world."

Arifa Akbar

    Britain becomes 'never, never land' as personal debt runs out of control, I, 28.9.2006, http://money.independent.co.uk/personal_finance/loans_credit/article1768829.ece

A precarious situation - especially if house prices crash

Published: 28 September 2006
The Independent
By Philip Thornton, Economics Correspondent

Tony Blair knows only too well the problem of debt. When he finally moves out of Downing Street, he can turn his attention to paying the mortgage on his £3.7m home in Mayfair.

Mr Blair's financial juggling act is being performed in almost every household in the land. Since Labour came to power, Britain's debt has ballooned almost threefold to £1.27trn.

Margaret Thatcher's "Big Bang" reform of the banking system made it easy to borrow while Gordon Brown's era of low interest rates has fuelled the appetite for debt.

While the vast majority of debt is tied up in mortgages, a significant chunk is unsecured borrowing. But does it really matter how much we collectively owe? As with all the most important economic issues, the answer depends on who you ask.

The Bank of England, whose job it is to set the interest rates that we pay on our debt, is relatively relaxed. Mervyn King, the Bank's governor, frequently says that rising insolvencies and home repossessions highlight a large amount of pain being suffered by a small number of people. In other words it is a social issue rather than an economic danger. It's a fair point. Households own £7.6trn worth of assets..

This looks healthy, unless of course house prices crash or interest rates - which have already gone up 40 per cent in the past three years - go through the roof.

Were that to happen it would be pretty disastrous. Families would lose their homes, leading to a drop in spending on the high street, in turn triggering a surge in unemployment and a potential banking crisis.

Far fetched? Not really - Japan has only just emerged from a decade-long period of stagnation after its debt bubble burst.

But neither risk looks likely to materialise. One bank, Alliance & Leicester, has calculated that the base rate, now at 4.75 per cent, would have to hit 8.5 per cent to put householders under the same level of pressure as at the peak of the Eighties boom.

The real danger is long-term. The larger the debt mountain, the less willingness consumers will have to take on more debt. At some point they might even decide to cut spending and rebuild savings to guard against a rainy day - Japan again provides the cautionary tale of what can happen to an economy.

At the same time the Bank of England may find the debt mountain makes it harder to set the right interest rate to tackle inflation. The larger the debt, the more painful the impact of any given increase.Critics say the current regime fuelled the debt boom by cutting interest rates each time the economy slowed. The next Chancellor will have to decide whether it is time to insist the Bank takes account of the potential dangers of a bubble in house prices. A little more pain now rather than a whole lot in a few years' time.

In the short term we can probably sleep easily in our beds. Figures show a third of homes are mortgage-free - meaning that at some point there will be a cascade of money coming down the generations. That should be a comfort to Katherine, Euan, Nicky and Leo Blair.

    A precarious situation - especially if house prices crash, I, 28.9.2006, http://money.independent.co.uk/personal_finance/loans_credit/article1768830.ece

Hamish McRae: Till debt us do part? Rate rises will test our ability to live with credit

There has been a problem of the interaction between credit providers and happy-go-lucky 90s consumerism

Published: 28 September 2006
The Independent

Credit and debt. They are the same thing of course but one is the nice word and the other the nasty one. The fact that Britons have per head double the debt of Continental Europeans could be attributed to our fecklessness but it is also a function of the quality of our credit system.

The newspapers and airwaves have been full of stories about UK debt levels but just as they emerged, the efficiency of our financial markets was ranked as the best in the world by the World Economic Forum's global competitiveness report - the country as a whole came tenth. Britons borrow because it is much easier to do so than it is for most Continental Europeans: the spread on mortgages is lower and the terms are less onerous, while personal loans and credit cards are easier to obtain.

If the efficiency of our credit machine is measurable, what about our supposed fecklessness? What about the interplay between the two? And, most pertinently, what would happen were our burden of debt to be stress-tested by a significant rise in interest rates?

The "fecklessness" charge is an interesting one. People are free agents, able to choose whether to borrow or not, and the great majority of borrowers do not get into trouble.

Rationally, it has for most of the post-war period been the right thing to do to borrow to buy property. A very small proportion of homeowners have actually lost money on property investment: people who were unable to keep up their mortgage payments in the early 1990s and lost their homes. That was utterly miserable for them and was the result of the UK having to adjust its interest rates to fit in with sterling's membership of the ERM: we had to have rates that were too high for Britain. But that is over now. Provided people managed to maintain their ownership - even those who bought at the wrong time or overpaid - they have eventually been rescued by the general rise in property prices.

But if mortgage debt is almost unequivocally "good", what about consumer debt? Interest rates are higher, the assets decline in value. It is hard to defend as a financial strategy, though of course it does enable people to get things they need earlier than they would otherwise be able to do so. And there is a moral issue here: what right does a society have to try and deny people access to credit just because they are using it to increase their consumption?

It is worth making the distinction, though, because in the past couple of years something very interesting has been happening to British borrowing habits. We have kept on borrowing for homes but we have become much more chary about borrowing for consumer goods. You can see this in the top two graphs. Overall debt relative to income took off around 2001 but over the past couple of years the rate of increase of consumer debt has fallen sharply.

As a general rule, people borrow about the same amount as their income: more when we buy our first homes, then gradually less as we get older. But over the past five years, that ratio has soared: we now on average have borrowing equivalent to one-and-a-half times our income. Why?

I have not seen any really satisfactory explanation and it is probably too soon to know but I can see bits of the answer. One is the macroeconomic point that real interest rates were relatively low by historic standards as the Bank of England (and, to an even greater extent, other central banks) cut rates to try to pull the world economy out of the 2001 recession. True, we did not cut rates quite as much as other countries but we had a larger fiscal boost as Gordon Brown moved from running a surplus to running a large deficit.

Another part of the explanation is connected to low interest rates: the housing boom. That was both the creation of low rates (because it reduced the burden of servicing the debt) but also the justification for further borrowing because rising prices made getting into debt a sensible financial decision.

Finally we have had security of employment: along with sustained growth has come a sustained large expansion of the job market. This has underpinned people's confidence in borrowing - that they can if necessary earn their way out of trouble.

So why has the consumer debt come back? Here I think it is largely the impact of higher interest rates. Remember the stock of debt is still growing; it is simply growing at a slower rate. But I suspect that as rates go up further there will be more of a scramble to clear consumer debt, particularly as the institutions offering mortgages see this as a growth market. A lot of people may simply be paying off credit cards by increasing their mortgages, which carries the risk of losing one's home but since the interest rate is much lower, reduces the monthly servicing bill.

There is, however, another factor at work: the fact that real post-tax incomes have stopped rising, as the bottom graph shows. While we were getting richer, we did not mind borrowing more. Now we are not, or at least not much, maybe we are tending to be a bit more careful. As rising taxes and the sharp increase in the price of essential items such as fuel bites into our monthly budgets, we realise that it is not a great idea to run up further debts.

Or at least that is the best explanation I can manage. I think there is an attitudinal shift taking place towards what might be called frivolous borrowing. There has been a problem of the interaction between the credit providers, who should carry some of the blame for showering credit on people, particularly the young, and the slightly happy-go-lucky "I want it now" consumerism of the late 1990s and early 2000s.

We have over the past couple of decades gone from a world where it was quite hard for lowish-earners to get easy credit to one where it is easy and it has taken a while for attitudes to catch up with these extended opportunities. But we are catching up now.

Are we adjusting in time for the next "stress-test"?

Um. Well, that depends on the pace and duration of the coming rise in rates, what happens to growth and the labour market and how well the financial institutions manage their way through what will be a worsening debt situation.

We are not going back to very high rates. In this age of low inflation, the absolute ceiling on short-term rates will, I think, be what was during the 19th and the first half of the 20th century the crisis rate: 7 per cent.

But that would hurt a lot. Growth? It is OK now and will be for the next 18 months, maybe longer. Jobs? The upward creep of unemployment may continue through next year. While it is hard to see it really hitting damaging levels, for some individuals times will indeed be tough. And managing the debt mountain? I hope that the financial institutions will do better than they did in the early 1990s when they requisitioned a lot of houses unnecessarily.

My guess is that unless house prices really bomb there is not an overall macroeconomic debt crisis hanging over us. But there is a crisis for some individual borrowers and that needs to be tacked sensitively and determinedly in the months ahead.

    Hamish McRae: Till debt us do part? Rate rises will test our ability to live with credit, I, 28.9.2006, http://news.independent.co.uk/business/comment/article1768876.ece

Customs cracks £5billion VAT fraud

Thursday September 21, 2006
Guardian
Ashley Seager and Ian Cobain



Customs officers have dealt a devastating blow to criminals defrauding the British taxpayer of billions of pounds every year after discovering that they all channelled their funds through the same small Caribbean bank.

In a joint Anglo-Dutch operation that included raids in London, the Netherlands and south Wales, First Curaçao International Bank (FCIB) was shut down after it was found that every individual arrested and charged with so-called carousel fraud in the last two years had an account there.

Investigators now suspect that around 2,500 other British citizens banking at FCIB are involved in carousel fraud, a crime that is estimated to be costing taxpayers at least £5bn a year.

"We think the carousel fraud industry has been holed below the waterline," said a British government source, echoing comments by the chancellor, Gordon Brown, who said at the IMF conference in Singapore at the weekend that the government was getting to grips with the problem.

Last night prosecutors in the Netherlands were hoping to question the bank's founder and owner, John Deuss, a Dutch oil trader. A colourful figure who has lived in Bermuda for many years, Mr Deuss, 64, was once caught breaking sanctions to help keep apartheid-era South Africa supplied with oil, and was accused of swindling the Soviet Union out of payments for oil worth around £180m at today's prices.

His sister, Martina Deuss, 60, has been arrested in the Netherlands, and is being questioned about the bank and its affiliated companies, while one of her homes, in Monmouthshire, was among the properties raided by Customs.

While Mr Deuss earned millions of dollars in fees from FCIB's customers, there is no suggestion that he has been involved in carousel fraud trades.

He confirmed to the Guardian yesterday that the bank was facing investigation over allegations of money laundering by some of its clients, but insisted that the bank and its affiliated companies, including Transworld Oil, have always complied with all applicable laws, regulations and rules. "Accordingly, the companies deny any wrongdoing in connection with this matter and will vigorously defend their interests."

The bank has since been placed into a form of administration to protect those customers who are innocent.

Losses to carousel fraud, which involves the repeated import and export of items such as mobile phones and computer chips with the VAT being reclaimed each time, have shot up over the past year, to at least £100m a week, as traders have used sophisticated computer programmes to create "virtual" trades without actually moving goods.

The scale of the fraud has become so colossal that it is distorting the nation's trade figures. Estimated losses during the last financial year would have been more than enough to build and equip a dozen big hospitals or 300 secondary schools, and exceeded Britain's total annual spending on overseas aid.

What was not clear until now was how these virtual trades were accomplished. FCIB's turnover has risen in line with the scale of losses to the British taxpayer as well as other governments across the European Union, all of which are under attack by the fraudsters.

Two years ago FCIB's volume of business was equivalent to $60m (about £32m). Before the bank was effectively closed last week, it had rocketed to $6.5bn. It had a British operation, Transworld Payment Solutions, which vetted potential FCIB clients. That company's offices in Knightsbridge, west London, were also raided by Customs officers and documents handed to the Dutch authorities.

The breakthrough came when a small team of Customs investigators decided not just to investigate individual carousel fraudsters, but to follow the money trail. Using their powers under the 2002 Proceeds of Crime Act - which compels British banks to report suspicions of money laundering - they found that huge sums of money were pouring in and out of FCIB via its correspondent banks which handled transactions with Europe. These were first Barclays and Dutch bank Rabobank, followed more recently by Union Bank of Switzerland. Each bank in turn shut the door on FCIB because they were anxious about the transactions.

The latest rejection, by UBS, prompted FCIB to warn many of its clients last month that it was being forced to shut their accounts, as without a correspondent bank in Britain, it would not be able to move funds for them any longer. The deadline for movement of money was the end of August and accounts were finally closed last Friday.

As a result of the disruption to fraudsters' banking facilities, HM Revenue & Customs (HMRC) last week reported a huge drop in the estimated volume of fraudulent exports of phones and computer chips in July. It said there was £1.6bn of fraudulent trade that month, down from more than £4bn a month in each of the previous four months.

HMRC is optimistic that the growing number of arrests of suspected fraudsters, combined with action to disrupt their banking facilities, is finally having an impact upon the crime.

    Customs cracks £5billion VAT fraud, G, 21.9.2006, http://www.guardian.co.uk/crime/article/0,,1877288,00.html

IMF sounds a warning on Britain's housing market

· Property prices expensive 'by most measures'
· Fear that rising interest rates will take toll

Thursday September 14, 2006
Guardian
Larry Elliott in Singapore and Angela Balakrishnan

The International Monetary Fund issues a stark warning today that Britain's over-valued housing market is vulnerable to further increases in interest rates.
In its half-yearly health check on the global economy, the fund highlights the UK as one of a handful of countries where house prices are expensive.

The IMF's World Economic Outlook says borrowing costs may have to rise again following last month's increase to 4.75%, and that tighter policy from the Bank of England poses a risk to the property market.

The IMF says fears about the cooling of the housing market in the United States are spreading to other countries such as Ireland, Spain and Britain where house prices seemed overvalued "by most conventional measures".

Recent house price surveys in the UK have shown a recovery after the easing of inflation in 2004 and early 2005. The warning from the IMF comes as a leading survey says house prices have risen at their fastest pace for two and a half years.

The Royal Institution of Chartered Surveyors says today that house prices rose for the fifth consecutive month in August as 35% more surveyors reported a rise in prices rather than a fall. The figure was up 5% from July.

The market was unseasonally buoyant, surveyors said, as buyer inquiries accelerated at the sharpest rate for three years and newly-agreed sales rose strongly. A shortage of new properties on the market also drove up prices, RICS said, outweighing the effect of August's quarter point interest rate rise.

"Last week's interest rate freeze will mean that the housing market will maintain its current positive momentum," Ian Perry, a RICS spokesman said.

However, the Council of Mortgage Lenders reported yesterday that the income multiple needed by first-time buyers to afford a property hit a record high in July of 3.24 times the average income. This was up from 3.21 in June, and 3.06 in the same month last year.

Analysts have said it is too early to assess the impact on buyer confidence from August's rate rise, but the IMF stressed that house prices "could come under pressure in a rising interest rate environment".

The City expects the Bank to raise rates to 5% in November in order to bring inflation back to the government's 2% target, but the fund says today that it was by no means guaranteed that the cost of borrowing would have to rise again.

"Future monetary policy decisions are delicately balanced. While risks to aggregate demand are skewed to the downside, particularly in 2007, there is also the possibility that energy price increases may yet give rise to second-round effects on inflation," the IMF report says.

The fund revises up its forecast for UK growth both this year and next. It expects the economy to expand by 2.7% in both 2006 and 2007, 0.2 points and 0.1 points higher respectively than it had anticipated in the last WEO in April. Unemployment, on the internationally agreed measure, is forecast to rise from 4.8% to 5.3% in 2006, falling back to 5.1% in 2007.

The housing market, it adds, has been important in stimulating growth. "In the UK, growth was around 3% in the first half of 2006. Robust employment creation and the stabilisation of the housing market underpinned consumption spending, while investment remained strong."

With the Treasury in the early stages of work on next summer's Comprehensive Spending Review, the fund says Gordon Brown will have to cut spending growth to keep the government's finances in order.

The WEO highlights the inadequacy of Britain's pension provision. "The fiscal position in the UK is less sensitive to population ageing than elsewhere in the EU, but with the public pension being considerably less generous than in other European countries, concerns have centred on whether individuals are saving enough to provide adequate retirement income."

The report says: "As suggested by [Lord Turner's] pensions commission, the introduction of a national defined contribution scheme with automatic enrolment and low operating costs may be useful to boost private savings."

    IMF sounds a warning on Britain's housing market, G, 14.9.2006, http://business.guardian.co.uk/story/0,,1871916,00.html

How click-happy Britain fell in love

with online shopping

Weather, broadband and credit cards have created
a phenomenon

Saturday September 2, 2006
Guardian
Richard Wray and Joel Raku

Rather than battle their way through the hordes on the high street at the weekend, British shoppers are embracing the internet, spending more than their European counterparts booking holidays, hunting out book and DVD bargains and having groceries delivered to their door.

Overall retail sales growth in Britain shows that consumers have been moving from scrimping and saving in order to pay off some of their debts, as a rise in interest rates looms, to splurging out on all sorts of goods and services. In August, retail sales grew at their fastest for 20 months according to the CBI. But online sales are increasing at an even faster rate.

The Interactive Media in Retail Group reckons online spending is growing 10 times faster than spending in shops. And it's not just "pure" internet players such as Amazon, Play.com and Cheapflights.co.uk that are seeing the benefit, the major bricks-and-mortar players have become aware of the shift in spending habits.

Long hours

This week, Tesco launched an all-out attack on rivals such as Amazon and Argos with the launch of Tesco Direct, a home shopping service that offers more than 8,000 items from furniture and electrical products to bicycles and golf clubs.

Part of the rapid growth in sales over the web in Britain is due to purely statistical reasons: online sales are a relatively small percentage of total sales. The British Retail Consortium estimates that less than 4% of all UK retail sales, which last year reached £249bn, are done online.

But British shoppers do seem to be making more use of the internet than consumers on the continent. Last year UK buyers spent an average of £875 on the web. That compares with £734 for second-placed Denmark, £405 for sixth-placed Germany and £254 by the average French shopper, according to the European Interactive Advertising Agency.

It is not just the quantity of things that British shoppers buy using their computer that make them Europe's most prolific consumers, it is the fact that they buy big-ticket items as well as their weekly groceries. While Britons spent an average of £875 last year, they spent that on an average of 12 items. Germans, in contrast, spent their £405 on 10 smaller cost items.

So why have Britons adopted the online shopping habit faster than people across the Channel? Theories range from meteorological factors: the British weather means shoppers prefer to stay indoors whenever they can, which may also explain why Denmark and Norway are heavy web shoppers, to cultural differences in that French and Italian consumers prefer to use the fresh fruit and vegetable markets on their doorsteps and do not need to go far to find a bakery. Another suggestion is that British consumers work longer hours and often use the web to save time.

But there are some basic differences in infrastructure that make Britain ripe for an explosion in online shopping, the most obvious of which is the take-up of high-speed internet connections. Broadband penetration in the UK is higher than in other parts of Europe and download speeds are faster, with many people on 8MB per second connections. That has allowed retailers to create ever more complex websites, showing items from different angles or in varying colours.

Alison Fennah, executive director of the European Interactive Advertising Agency, says: "Broadband has got a lot to do with it. Where there is high penetration of broadband, take up of services such as online shopping tends to happen more quickly."

Britain also has a certain first mover advantage, as many online retailers from the US, such as Amazon, used the UK as a springboard into Europe. As a result, broadband penetration increases and e-retailers become more advanced in the rest of Europe. Other countries are expected to catch up with Britain.

There is also the fact that British consumers are willing to brandish their plastic, having run up a grand total of £54.7bn on their flexible friends, and using a credit card is often central to an online transaction. Germans, in contrast, are much more wary of personal debt.

"We are certainly very willing in the UK to use our credit cards," says Ms Fennah. "We've got a higher level of credit card debt than the rest of Europe."

Some within the retail industry have suggested that the flight from the high street to the internet could speed up the collapse of English town centres, a process already well under way thanks to the proliferation of huge, out-of-town shopping centres.

Better prices

Brian McBride, managing director of Amazon.co.uk, believes the internet and the high street can live together, but only if traditional retailers change the way they operate. "I think the high street will always exist, but the online world is redefining what the high street is about. If you are simply a music or book store trying to compete only on price you are going to struggle; you have to offer some differentiated service," he says.

"It's not an either-or situation; you will see people move between the two. For instance, people often start by doing their research online and then buying on the high street, or see a deal on the high street and then check for better prices online."

How click-happy Britain fell in love with online shopping, G, 2.9.2006, http://technology.guardian.co.uk/news/story/0,,1863470,00.html