U.K. Retail Sales Decline Most Since April 2012 on Clothing

U.K. retail sales fell more than economists forecast in January with the biggest drop in almost two years, led by lower demand at food and clothing stores.

Sales including fuel plunged 1.5 percent from December, when they surged 2.5 percent, the Office for National Statistics said today in London. The decline was the biggest since April 2012 and exceeded the 1 percent median forecast of 19 economists in a Bloomberg News survey.

The slide, in a critical month for retailers as they clear winter stocks with seasonal discounts, highlights the risks to Britain’s recovery. The Bank of England raised its economic projections this month and forecast that household-spending growth will accelerate to more than 3 percent this year from 2.25 percent in 2013.

“This has to be viewed in the context of the surge in sales in December,” said James Knightley, an economist at ING Bank in London. “With consumer confidence on a strong upward path, employment rising and wage growth starting to show some hints of life, we look for the household sector to contribute strongly to gross domestic product growth this year.”

Today’s report showed that food sales fell 3.4 percent in December from January, while sales of clothing, footwear and textiles dropped 3.5 percent, the most since April 2012.

Cosmetic Boost

Household goods sales increased 5.3 percent, boosted by furniture and electrical goods. There was also an increase in sales of cosmetics, which is often seen in months when people buy fewer clothes, the ONS said.

From a year earlier, retail sales were up 4.3 percent, and the statistics office said the data still points to growth in the industry. In the three months through January, sales rose 1.1 percent compared with the previous three months.

The pound gained 0.1 percent to $1.6671 at 10:25 a.m. London time after dropping 0.6 percent in the previous four days. Sterling strengthened 0.2 percent to 82.22 pence per euro.

In a separate report, the ONS said Britain posted a smaller-than-forecast budget surplus in January as taxes from incomes and company profits fell. The surplus of 4.7 billion pounds compared with 6 billion pounds a year earlier and economists’ forecast for 8 billion pounds.

While Britain’s economy is strengthening and inflation is cooling, wage growth remains subdued, keeping a squeeze on consumers.

Savings Rate

“Much of the spending probably continued to come from households reducing their savings rate,” said Christian Schulz, senior European economist at Berenberg Bank in London. “As wage growth begins to pick up and inflation falls, the real income squeeze on households should ease which would support a more sustainable consumption recovery. In the meantime, however, the rapid pace of expansion may slow.”

Researcher Kantar Worldpanel said this month that the U.K.’s grocery market grew at the slowest pace in nine years in the past three months. Sales expanded 2.4 percent in the twelve weeks to Feb. 2, down from 2.9 percent growth in the previous three-month period. “Brighter economic prospects are yet to be seen in the nation’s shopping trolleys,” said Fraser McKevitt, an analyst at Kantar.

The ONS said the retail sales deflator, a measure of changes in shop prices, was 0.2 percent in January, down from 0.5 percent. That’s the smallest since September 2009, when it fell 0.8 percent. The deflator on food was 1.8 percent.