February 18, 2011 / 12:10 AM / 7 years ago

Retail sales rebound in January but outlook uncertain

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

LONDON (Reuters) - Retail sales rebounded far more than expected in January after December’s heavy snow, but failed to ease concerns consumers will be under pressure this year from government cutbacks and possible interest rate rises.

Official data showed retail sales volumes jumped by 1.9 percent on the month -- more than three times faster than analysts had forecast -- following December’s downwardly revised fall of 1.4 percent, the worst for any Christmas on record.

Sterling surged half a cent against the dollar to a two-week high on the data, which boosts expectations of a recovery in gross domestic product after a shock contraction in the final three months of 2010.

An uncertain economic outlook is posing a dilemma for the Bank of England which is trying to juggle the demands of reining in inflation, which at 4 percent is double its target, while not harming economic recovery by raising interest rates too soon.

Economists warned that it was too early to tell how consumers were facing up to a value-added tax rise last month and public spending cuts this year.

“While we expected there to be some clawback from December’s dismal snow-hit retail sales, today’s jump is a welcome surprise. But it is still far too early to conclude that consumers are weathering the storm,” said Daiwa economist Hetal Mehta.

Economists expect consumer spending to be under pressure throughout 2011. High inflation and limited wage growth is likely to focus spending on essentials, and unemployment is forecast to rise due to job losses from public spending cuts.

Markets are also pricing in an interest rate rise as soon as May, saying the Bank will forced to act then to curb inflation and kick off monetary tightening which will further pressure consumers.

TAILING OFF

The Office for National Statistics (ONS) said it was hard to disentangle the effects of two successive annual rises in VAT, combined with unusually harsh winter weather in January 2010 and December 2010.

However, there was some anecdotal evidence that shoppers made major purchases before the VAT rise took effect on January 4, and that sales fell off thereafter -- a pattern also noted by trade body the British Retail Consortium.

“Our own figures show spending tailed off sharply as the month developed,” BRC Director-General Stephen Roberton said.

“Slumping consumer confidence indicates concerns about jobs and finances are now reasserting themselves. February’s results will be a better indicator of how things really are.”

Department store John Lewis, a favourite of middle-class Britons, posted a fourth consecutive week of lacklustre sales, adding to evidence consumers are cutting back on spending.

Year-on-year, retail sales volumes were up by 5.3 percent in January, their biggest annual rise since November 2004. But last month’s data was flattered by the comparison with sales in January 2010, when harsh weather heavily disrupted trade.

Petrol and diesel sales showed the biggest monthly gain in January, though the rise was broad-based with a strong increase in sales at department stores and clothing and household goods retailers.

December sales figures were revised down sharply by the ONS from already-weak initial estimates, as the retailers who were slower in returning information to the ONS were also those worst-hit by the weather.

Moreover, prospects for later in the year are weak, according to the most recent Nationwide survey of consumer confidence, which showed morale falling close to its lowest level in almost two years.

The retail sales deflator, a measure of the rising cost of goods and services, rose by 2.7 percent in January after a 2.0 percent rise in December.

Editing by Susan Fenton

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