UK retail sales weaker in December

British retail sales volumes rose much less than expected in December, flying in the face of strong trading reports from most…

British retail sales volumes rose much less than expected in December, flying in the face of strong trading reports from most retailers over the crucial Christmas shopping season.

Many analysts had expected a sales boost from consumers bringing forward spending before the temporary cut in value added tax was reversed on January 1st, and the figures dented recent optimism about the prospects for economic recovery.

The Office for National Statistics said retail sales volumes rose 0.3 per cent last month, less than a third of the 1.1 per cent rise analysts had expected and the weakest for the month of December since 2007.

On the year, sales volumes were up 2.1 per cent, also weaker than the 3.0 per cent expected and the lowest annual rate for a month of December since 1998.

Official data next week is expected to show the economy returned to growth in the last three months of 2009 after 18 months in recession, but some analysts fear Friday's data point to a weaker reading than the consensus for 0.4 per cent growth.

"December's modest rise in UK retail sales is disappointing given the far more upbeat tone of the surveys and trading updates," said Vicky Redwood at Capital Economics.

"They are clearly a timely reminder that, with a fiscal squeeze looming and renewed falls in house prices and employment potentially on the cards, consumers shouldn't be relied on to drive a strong economic recovery."

Bank of England Governor Mervyn King warned this week that British households were likely to feel the painful after-effects of recession - such as higher unemployment and meagre wage growth - for some time to come, suggesting he is no hurry to start tightening policy.

Most city analysts reckon the central bank will halt its quantitative easing programme once it has completed its current programme of £200 billion of purchases at the end of this month and will start hiking interest rates from the autumn.

Financial markets started pricing in the possibility of earlier rate hikes after data showed consumer price inflation accelerated faster than expected in December.

Friday's figures help explain that pick-up and indicate retailers were keen to rebuild margins after six months of discounting and heavy price cuts last Christmas, when the sudden economic downturn forced stores to slash prices to shift stock.

Retailers hiked prices at their fastest rate in nine months, in December by 1.2 per cent compared with the previous year. That compared with prices in November which were 0.6 per cent lower on the year, while prices in December 2008 were down 1.8 per cent on the year.

Retail sales values were buoyant, rising 0.9 per cent on the month and 3.6 per cent on the year - the strongest annual rise for a December since 2006 and backing up anecdotal evidence from retailers like supermarkets Tesco, Sainsbury's and electricals retail Kesa that sales were healthy.

But stores have also warned that 2010 could be a tough year as Britons feel the pinch from pay freezes, government tax hikes and spending cuts.

Reuters