Shock retail sales fall casts pall over 2013 outlook

LONDON Fri Jan 18, 2013 7:41pm GMT

A shopper rests on his sale bags as others walk past him on Oxford Street in central London, December 26, 2012. REUTERS/Andrew Winning

A shopper rests on his sale bags as others walk past him on Oxford Street in central London, December 26, 2012.

Credit: Reuters/Andrew Winning

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LONDON (Reuters) - British retail sales unexpectedly fell last month, dashing hopes of a Christmas boost for a struggling economy and raising the likelihood that the country is slipping into its third recession in four years.

Poor Christmas sales have already forced three well-known retail chains to seek protection from their creditors, and Friday's official data points to a broader malaise on Britain's embattled high streets.

Retail sales dropped 0.1 percent on the month in December, leading to the most sluggish annual growth since April, and economists said falling real wages and looming cuts to social benefits are likely to ensure further gloom in early 2013.

"The situation is unlikely to improve much over the coming year. Employment growth is already cooling off and the trajectory for inflation is upwards. Both mean that households will have less spare cash and this should hold back demand," said Scotiabank's Alan Clarke.

Britain's economy is widely estimated to have contracted in the last three months of 2012, and a further fall in early 2013 would tip the country back into recession, putting more pressure on a government with little cash to spare to boost growth.

Sterling fell to its lowest against the euro in nearly 10 months after the figures. Weak growth would also further endanger the government's deficit-reduction targets, and increase the chance that the country loses its coveted triple-A debt rating.

There appears to be scant prospect of new Bank of England action to boost the economy either. New policymaker Ian McCafferty, a former chief economic advisor to the Confederation of British Industry, said he saw little scope for further stimulus to the economy.

Instead, he worried that future rises in the cost of food and government-regulated charges for energy, transport and university tuition could keep inflation above target for the next couple of years, creating increasingly strong pent-up wage demands - and also weighing on consumer demand.

HOUSEHOLD GOODS DOWN

The main driver behind the monthly fall in sales was non-food retail, chiefly sales of household goods which dropped 3 percent - the biggest fall since January 2010, the ONS said. Food sales, which fell 0.3 percent on the month, also contributed to the weakness.

"The high street seems to have stalled again over the past few months," said Investec economist Philip Shaw.

"Recovery prospects will depend strongly on a pick-up in consumer activity over the first few months of 2013."

Household spending in Britain - some two thirds of the economy - has taken a hammering from a combination of below-inflation wage growth, worries about the economy and government austerity measures.

Still, trading updates from six major British retailers on Thursday demonstrated that must-have gadgets, cheap fashion and internet sales enabled some to overcome an otherwise tough festive season.

The official data showed online and other types of non-store retail grew almost 12 percent on the year in December. The share of internet trading continues to rise, and one industry survey has forecast it to grow another 12 percent this year to 87 billion pounds.

For some retailers, this Christmas - a period when many make as much as half of their annual profit - was their last. Three household names in British retail have gone into administration since the start of the year, including 92-year-old music retailer HMV.

Boding ill for quarterly GDP numbers in the last quarter of 2012, retail sales fell 0.6 percent from October to December compared with the previous three months - the biggest fall since August 2011.

The figures follow another survey by the British Retail Consortium, which showed that the total value of goods sold in December was up just 1.5 percent on the year.

The ONS said retail sales excluding fuel fell 0.3 percent on the month and were 1.1 percent higher than in December 2011, compared to economists' forecast for rises of 0.1 percent on the month and 2.1 percent on the year.

(Additional reporting by David Milliken and Li-mei Hoang; Editing by Hugh Lawson)

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