U.K. January Retail Sales Worst Since June 2008

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Cold weather and restoration of the value added tax to 17.5% dampened British household spending in January with sales falling sharply.

Retail sales volume dropped 1.8% on a monthly basis in January, following a revised 0.2% fall in December, the Office for National Statistics said in a report on Friday. This was the biggest decrease since June 2008 and much larger than the expected 0.5% fall. "The weather had a significant impact on retail sales in January," the statistical office said.

The bigger-than-expected fall could add to fears that underlying consumption growth is set to remain subdued this year, said Daiwa Capital Markets Europe economist Colin Ellis. With the labor market still very weak and private sector earnings growth almost non-existent and tax rises and public spending cuts looming on the horizon, the economist said there is little reason to expect a strong bounce back in household spending in 2010. As such, the optimistic growth forecast of the central bank has just taken another knock, Ellis added.

Year-on-year, retail sales volume rose 0.9% in January, smaller than the consensus forecast for a 1.1% rise and December's 2.4% growth. Predominantly food stores increased 0.4% compared to the same period a year ago, while growth in non-food stores was 2.8%.

According to James Knightley, an economist at ING Bank NV, sales in aggregate should rebound in February, but given the high household debts, incomes are under downward pressure. Further, with rising taxes, consumer cash flows are likely to be restricted in 2010, the economist said. This points to very modest retail sales growth through most of this year, he said, which will keep the Bank of England rhetoric dovish and sterling under pressure.

Total sales volume in the three months to January was 2.2% higher than the same period a year ago. Sales volume during November to January decreased 0.5% when compared to the previous three months.

The seasonally adjusted value of retail sales in January rose 3.2% from last year. Monthly sales values for food stores and non-food stores rose 3% each.

Capital Economics' Jonathan Loynes noted that while January's weakness in high street spending was clearly exacerbated by special factors, the fragile outlook for the consumer sector is an important reason to expect the economic recovery to continue to disappoint over the coming quarters. The economist said spending growth is unlikely to maintain the momentum with real income under pressure from weak wage growth and rising inflation.

Cold weather and restoration of the value added tax to 17.5% dampened British household spending in January with sales falling sharply. (Market News Provided by RTTNews)