Royal wedding, April sunshine boost retail sales

LONDON Thu May 19, 2011 3:43pm BST

People use escalators as they shop in a mall in London January 6, 2011. REUTERS/Stefan Wermuth

People use escalators as they shop in a mall in London January 6, 2011.

Credit: Reuters/Stefan Wermuth

LONDON (Reuters) - The Royal wedding holiday and record warm weather encouraged shoppers to splash out in April, giving hard hit retailers a one-off boost but doing little to change the picture of a fragile economic recovery.

Underlying sales growth remained muted and economists said April's gains could be reversed in coming months as soaring prices, muted wage growth and public spending cuts squeeze consumers' budgets.

The Office for National Statistics said sales volumes including automotive fuel rose 1.1 percent last month, well above analysts' forecasts for an increase of 0.8 percent, and the biggest rise for a month of April since 2002.

The pound quickly reversed its initial gains after the data as investors figured the economic recovery was still too fragile to warrant any monetary tightening from the Bank of England, with money markets not pricing in a first hike until January 2012.

"We think this points to a one-off lift, rather than the start of a stronger trend," said David Page, economist at Lloyds Corporate Markets.

A combination of the Royal wedding holiday on April 29 and the warmest April weather on record gave a particularly strong boost to clothing and food retailers, who enjoyed their strongest monthly sales growth in years, the ONS said.

This unusual mix of events complicates the interpretation of economic data, but most economist see an overall drag on second quarter economic growth.

Bank Deputy Governor Charles Bean also sounded a cautious note on the outlook for consumer spending, saying households faced a "rather difficult" next few years, suggesting that he, at least, is not about to start calling for higher rates.

"With the squeeze on real pay likely to continue through this year, it seems likely that consumer spending will remain subdued through this year at least," he said in a speech.

Bean is one of the six policymakers to have consistently voted to keep at a record low of 0.5 percent despite inflation running at more than double the Bank's 2 percent target.

UNHAPPY SHOPPERS

Surveys from the CBI and British Retail Consortium had already hinted at strong sales growth in April, but monthly sales data are choppy, making them hard to interpret.

The underlying trend is weak, however, with ONS data showing sales in the three months to April rose by a lacklustre 0.2 percent. Sales growth excluding fuel was flat.

"The broader picture remains one of immense weakness in the household sector, and retail sales are likely to disappoint over the coming months," said Nida Ali, economic adviser to the Ernst & Young ITEM Club.

There was some good news from a CBI survey that showed an improvement in factory orders in May. But firms expected output growth to weaken in the coming months, and separate data showed car output fell more than 12 percent last month.

"The concern is that manufacturers will find life increasingly challenging over the coming months as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand," said Howard Archer, economist at IHS Global Insight.

Consumer morale has been weakening for months, with the latest survey by mortgage lender Nationwide showing a dip in April, driven by Britons' gloomy outlook and a reluctance to splash out on big purchases.

And retailers have already warned that they face tough times ahead. On Wednesday, babycare firm Mothercare announced it would close over a quarter of its British stores after a 69 percent plunge in profits over the last year.

Food wholesaler Booker said it had enjoyed a boost to sales and profit from retailers looking for cheaper items to enable them to protect their margins.

(Editing by Patrick Graham and Toby Chopra)

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