Bloomberg News

U.K. Retail Sales Drop More Than Forecast on Fuel, Job Fears

June 16, 2011

(Updates with comment from economist in fourth paragraph.)

June 16 (Bloomberg) -- U.K. retail sales dropped more than economists forecast in May as higher fuel costs and concern about employment prospects restrained consumer spending.

Sales fell 1.4 percent from April, when they rose 1.1 percent, boosted by warm weather and an extra public holiday, the Office for National Statistics said today in London. The median forecast of 24 economists in a Bloomberg survey was for a 0.6 percent decline. On the year, sales increased 0.2 percent.

The pound dropped and bonds extended their gain after the report. U.K. consumers are being squeezed by inflation that’s outpacing wage growth, while sentiment is being undermined by the government’s budget squeeze. Bank of England Governor Mervyn King said yesterday the economy is undergoing a rebalancing that will take several years and defended the bank’s decision to leave interest rates at a record low to aid the recovery.

“Consumers immediately retrenched after being encouraged to spend in April by warm weather and the royal wedding,” said Howard Archer, an economist at IHS Global Insight in London. “Spending is going to remain very weak for the rest of this year as inflation accelerates and wage growth remains weak. Consumers have an awful lot to worry about.”

The pound extended its decline against the dollar after the report and was trading at $1.6119 as of 10:13 a.m. in London, down 0.5 percent since yesterday. The yield on the 10-year gilt was down 3 basis points at 3.20 percent.

Food Sales Plunge

The monthly drop in retail sales in May was the biggest since January 2010. Food sales fell 3.7 percent from April, the most since June 2008, the statistics office said. Sales at household-goods stores slipped 0.9 percent and clothing and footwear sales declined 0.8 percent.

Excluding fuel, retail sales fell 1.6 percent on the month in May and were unchanged on the year. The statistics office said retailers cited fuel costs and unemployment fears as factors restraining spending.

Tesco Plc, Britain’s No.1 grocer, said on June 14 that U.K. same-store sales rose only 1 percent in the first quarter amid “constrained demand” for general-merchandise items such as electronics. Chief Financial Officer Laurie McIlwee said many Britons “are shopping on a smaller budget due to fuel prices” and “sentiment has not really improved at all.”

While a Nationwide Building Society report yesterday showed consumer confidence rose in May, it said “underlying” sentiment remains “cautious.”

King Defense

The Bank of England held its key interest rate at 0.5 percent this month as policy makers prioritized aiding the recovery over tackling inflation that’s more than twice their 2 percent target. U.K. jobless claims surged at their fastest pace in almost two years in May, data showed yesterday. In the three months through April, wage growth was an annual 1.8 percent, compared with a May inflation rate of 4.5 percent.

King said in his Mansion House speech yesterday that while the bank could have raised its benchmark rate to cool inflation, this would have led to a weaker recovery. He also said it wouldn’t have insulated consumers from the surge in oil prices.

A rate increase “would have meant a weaker recovery, or even further falls in output” and “a risk of inflation falling well below the target in the medium term,” he said.

Investors pushed back bets on the next Bank of England rate-increase to beyond May of next year, according to forward contracts on the sterling overnight interbank average. A week ago, traders were betting on an increase in April, data from Tullett Prebon Plc showed.

The retail sales deflator, a measure of changes in shop prices, rose to 3.8 percent in May from 3.7 percent in April, the statistics office said. Excluding auto fuel, the deflator eased to 2.5 percent from 2.7 percent. The deflator for food sales jumped to 5.3 percent from 4.6 percent.

Internet sales accounted for 9.4 percent of all retail sales, compared with 7 percent a year earlier. Average weekly internet sales in May amounted to 527 million pounds ($851 million), the statistics office said.

--With assistance from Mark Evans in London and Lukanyo Mnyanda in Edinburgh. Editors: Fergal O’Brien, Andrew Atkinson

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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