May 22, 2013 / 8:37 AM / 6 years ago

Plunge in UK retail sales points to fragile economy

LONDON (Reuters) - Retail sales dropped at their sharpest pace in a year last month, a reminder of weakness in the country’s economy after some recent signs of recovery.

Sales of food plunged 4.1 percent from March, the worst showing in almost two years.

As the government prepared to face a call from the International Monetary Fund to do more to help growth, official data also underscored the size of the budget deficit, which hit a record high on one measure last month.

Retail sales volumes including automotive fuel fell 1.3 percent in April from March, the Office for National Statistics said on Wednesday. Compared with a year earlier, sales inched up 0.5 percent, with both readings much weaker than forecast by economists.

“Retail sales give a timely reminder why it’s too premature to call the UK as being out of the woods,” said Rob Wood, economist at Berenberg Bank.

“They highlight the challenges for the UK; households are struggling as price rises outstrip earnings, sharp government benefit cuts are going to start showing up in this data soon.”

The pound fell and British government bond prices rose after the data releases. The IMF will deliver its annual report on Britain later in the day. Last month, its top officials said economic weakness had lasted too long and it was time to consider a new approach.

The government has vowed to stick to its debt-cutting course.

A persistent minority of policymakers at the Bank of England appear to take a similarly gloomy view of the economy, despite forecast-beating growth early this year.

Three out of nine members of the Monetary Policy Committee voted to restart bond purchases with new money, minutes of their May meeting showed. Governor Mervyn King was outvoted in his penultimate monetary policy meeting before retiring, when he called again for an extra 25 billion pounds of purchases.

Consumer spending, which drives 60 percent of Britain’s gross domestic product, remains fragile after years of below-inflation wage growth and government austerity measures.

There was little good news on Britain’s finances either.

Net public borrowing came in at 8.035 billion pounds in April, the first month of the 2013-14 fiscal year. That was the highest reading for a month of April on record.

Although borrowing excluding financial interventions, known as PSNB-ex, came in lower than expected, it was flattered by a 3.9 billion pound transfer from the Bank of England. Last year the bank agreed to return to the finance ministry interest payments on the gilts bought as part of quantitative easing.

Stripping out that effect, as well as a reduction in April 2012 figures from Royal Mail pension assets, PSNB-ex rose to 10.2 billion pounds in April from 8.9 billion a year earlier.

The government had originally planned to eliminate Britain’s underlying budget deficit by 2015 with spending cuts and tax rises, but a weak economy has forced it to extend austerity by another two years.

Editing by Mike Peacock

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