Posted 15 February 2007 - 05:31 AM
U.K. January Retail Sales Decline the Most Since 2003 (Update2)
By Brian Swint
Feb. 15 (Bloomberg) -- U.K. retail sales unexpectedly fell in January by the most in four years, suggesting a surprise increase in interest rates discouraged spending.
Sales declined 1.8 percent, the biggest drop since January 2003, from December, when they rose 1.1 percent, the Office for National Statistics said today in London. Economists expected a gain of 0.2 percent, according to the median of 32 forecasts in a Bloomberg News survey.
This report and another showing weaker house-price gains suggest three interest-rate increases by the Bank of England since August are starting to slow Europe's second-biggest economy. The pound fell as investors pared bets that policy makers will raise borrowing costs again.
``Retailers are in dire straits,'' said Raj Gunaratna, an economist at 4Cast Ltd. in London who formerly worked at the U.K. Treasury. ``Consumers are tightening their belts, suggesting these last three rate hikes are starting to bite.''
Investors pared bets on a quarter-point rate increase to 5.5 percent by June after the report. The implied rate on interest- rate futures contract for that month fell four basis points to 5.69 as of 9:58 a.m. in London today. The contract settles to the three-month London interbank offered rate for the pound, which averaged about 15 basis points more than the bank's benchmark for the past decade.
The pound fell about 0.5 percent to $1.9571, from $1.9655 before the release.
RICS Survey
U.K. house prices rose at the slowest pace in seven months in January, a survey by the Royal Institution of Chartered Surveyors in London showed today.
``It's understandable that talk will increase of the U.K. consumer slowing,'' said Michael Taylor, an economist at Lombard Street Research in London who formerly worked at the Department of Trade and Industry, after today's reports.
Lower monthly retail sales were led by a 4.4 percent drop in clothing and footwear and a 4.2 percent decline at household goods and electronics retailers, the statistics office said. Sales of sporting goods and books also fell. The survey covers the period from Dec. 31 to Jan. 27.
Monsoon Plc, the owner of the Monsoon and Accessorize fashion chains, said Jan. 25 that sales at stores open at least a year declined 8 percent in December and January.
Record Debt
Higher borrowing costs may lead consumers to rein in spending as they pay back a record 1.3 trillion pounds ($2.5 trillion) of debt. Personal insolvencies reached a record 107,288 in 2006, the Department of Trade and Industry said Feb. 2. The Bank of England unexpectedly raised its key rate to 5.25 percent on Jan. 11.
``Each quarter-point hike is equivalent to around 50 pounds off an average person's monthly income,'' said David Page, an economist at Investec Securities in London. ``That will come out of spending more than anything else.''
Stores are discounting to attract shoppers. The retail price deflator, a measure of retail inflation, dropped 0.4 percent in January from a year earlier, the first decline since August.
Debenhams Plc, Britain's biggest department-store company after John Lewis Partnership Plc, cut prices by more than 70 percent on some goods a day after Christmas.
Overall consumer prices fell 0.8 percent on the month, the most in four years, the government said Feb. 12.
Online Spending
Consumers did still step up spending online. Non-store retailing and repair, a category which includes Internet sales, rose 17.7 percent on the year, the biggest gain since records began in January 1986.
Shoppers helped power the fastest economic growth in two years in the fourth quarter as rising house prices and falling unemployment encouraged them to spend.
``Even though rates are going up and some peoples' mortgages are more expensive, everyone's got a job, and that's fuelling spending,'' said James Shugg, an economist at Westpac Banking Corp. in London.
Jobless claims fell last month by the most in 2 1/2 years, the government said yesterday. House prices rose 9.9 percent in the year through January, HBOS Plc, the U.K.'s biggest mortgage lender, said Feb. 8.
Energy bills, which pushed inflation to a decade-high in December, may fall and give consumers more money to spend in shops this year. Centrica Plc, the country's biggest energy supplier, said Feb. 8 it will cut tariffs for residential natural-gas and electricity customers for the first time since 2001 as wholesale prices fell. Rivals Scottish & Southern Energy Plc and E.ON AG also pledged to reduce bills.
The consumer price inflation rate fell to 2.7 percent last month because of lower energy costs, retreating from 3 percent in December. The Bank of England yesterday forecast inflation will slow to below its 2 percent target later this year, assuming interest rates rise another quarter point.