Retail sales bounce back

LONDON Tue Feb 8, 2011 4:58pm GMT

Shoppers walk into a shop on Oxford Street, in central London, December 27, 2010. REUTERS/Paul Hackett

Shoppers walk into a shop on Oxford Street, in central London, December 27, 2010.

Credit: Reuters/Paul Hackett

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LONDON (Reuters) - Retail sales bounced back last month and house prices fell at a slower pace, surveys showed on Tuesday, suggesting the economy may have gathered some momentum following a shock contraction late last year.

Modest improvements in both surveys underline the tricky balancing act facing the Bank of England as it tries to cut high inflation without damaging the fragile economic recovery.

Economists expect the bank to leave interest rates at their record low of 0.5 percent on Thursday despite concerns about its credibility given high inflation, although the decision is expected to be the most finely balanced for some time.

Chancellor George Osborne said the government would not reverse its programme of spending cuts and tax rises to try to reduce a record peacetime budget deficit, despite Labour claims that it could damage the economic recovery.

"In the last week there has been more encouraging survey data showing services, construction, retail and especially manufacturing all growing more strongly -- something the opposition have been mysteriously silent about," he told parliament.

However, the retail sales figures were not as encouraging for the economy as the headline number may have suggested.

While the British Retail Consortium said like-for-like retail sales rose by 2.3 percent in January, compared to a year before, the trade body warned that the figures had been depressed by snow in January 2010.

Heavy discounting, pent up demand after December's bad weather and a rush to beat the rise in the VAT sales tax on January 4 fuelled a rush of buying in the first few days of the month which then petered out.

"The underlying trend was not as healthy as January's headline growth rate in sales suggested," said Howard Archer, chief UK economist at IHS Global Insight.

"Consumers face serious headwinds and uncertainties, so many will have seen the sales as a time to make purchases that they could increasingly struggle to make in 2011."

PRESSURE ON CONSUMERS

The government is cutting public spending by 81 billion pounds over four years to help to virtually eliminate a budget deficit of 11 percent of GDP.

Tax rises, rising unemployment and inflation running at nearly double the Bank's 2 percent target are also eroding consumers' spending power.

Stephen Robertson, BRC director general, said January's retail sales growth was driven by a "short but strong burst" of buying early in the month, and that the outlook in the coming months was difficult.

"Turning round consumer confidence is central to turning round the economy," he said. "A range of pressures is bearing down on consumers."

A separate survey showed house prices in England and Wales fell in January, although the pace of decline eased for a third consecutive month.

The Royal Institution of Chartered Surveyors' seasonally adjusted house price index rose to -31 from -39 in December, its highest level since July and better than the forecast of -38.

But economists said a fall in completed house sales and a drop in enquiries from buyers could mean more gloomy news ahead.

"We continue to see housing as stuck in a low transactions, modestly falling prices rut," Malcolm Barr, economist at J.P. Morgan said in a note. "This survey does not change that view."

The two surveys had little impact on the gilts market and there was solid cover for an auction of 1 billion pounds of 2022 index-linked gilts as investors tapped into stronger investor demand for inflation-protected debt.

(Editing by Ron Askew)

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