UK retail sales slump in December as inflation bites

Britain’s retailers suffered a surprise end-of-year slump in sales in a sign that rising prices since the Brexit vote are starting to hit people’s spending power.

Sales volumes dropped by 1.9% in December, the retail industry’s crucial Christmas month, according to official figures. That was the biggest drop since April 2012 and far worse than forecasts for a 0.1% dip in a Reuters poll of economists. Compared with a year ago, sales were up 4.3%, below a forecast for 7.2% growth.

Industry experts cautioned against reading too much into a single month’s figures and instead pointed to news of continued growth for the final three months of the year as a whole. Sales from October to December were up by 1.2% on the previous quarter, the Office for National Statistics (ONS) said, describing the performance as a “strong end to 2016”.

But signs that momentum dipped at the end of the year were taken by economists as a flavour of the pressures to come in 2017 as shoppers adjust to rising prices on the back of a weaker pound. The drop in sterling since the referendum has raised import costs and some of that is now being passed on to consumers. The UK’s main inflation rate hit a two and a half year high in December.

Reacting to the retail sales news, Alan Clarke, an economist at Scotiabank, called it a “disastrous December”.

“We know from the CPI [inflation] data earlier in the week that prices rose more than expected in December and now we also know that sales volumes fell.

“This is likely to be the theme for the rest of the year – higher prices will reduce disposable income and hurt consumer spending growth,” he said.

The pound dropped to below $1.23 after the figures, down by 0.4% from the day before, reflecting worries that the squeeze on consumer spending will hit overall economic growth this year.

The official retail figures for December contrasted with the largely upbeat tone of retailers’ Christmas trading updates but echoed signs of a slowdown in spending reports from debit card companies.

Consumer spending has been the main driving force behind the UK’s relatively strong economic growth since the EU referendum. Figures next week are expected to show the economy continued to grow at a relatively solid pace in the final quarter of 2016.

But the slowdown in retail sales fanned fears that consumers will struggle keep up that support to the economy.

“December’s data delivered some unpleasant omens for this year,” said Martin Beck, senior economic advisor to the forecasting group EY ITEM Club.

“The squeeze on households’ real incomes is gradually tightening, implying a tough 2017 for retailers.”

Month-on-month retail sales figures can be volatile and the ONS focussed instead on the quarterly figures.

ONS senior statistician Kate Davies said: “Retailers saw a strong end to 2016 with sales in the final quarter up 5.6% on the same period last year, although the amount bought fell between November and December once the effects of Christmas are removed.

“There were some notably strong figures from smaller retailers, in particular butchers, who reported a significant boost in sales in the run up to Christmas.”

The ONS reported that small businesses enjoyed an estimated 17.4% rise in sales compared with December 2015.

Feedback from businesses, such as butchers, suggested that meat purchases in preparation for Christmas had contributed to good sales, in addition to an extra trading day this December. The largest contribution to the month-on-month fall in sales came from non-food stores, it said.

Industry experts said December’s drop in sales should be seen in the context of a boost in November from Black Friday discount events.

“Although the December figures were down on November, it would be a mistake to focus too heavily on a monthly drop in sales,” said Ian Gilmartin, head of retail and wholesale at Barclays.

“It doesn’t really matter to a retailer whether they generate revenue in November or December. What they care about is their overall performance, and this data shows that the net result for the final quarter was much more impressive this year.”

The Bank of England, which cut interest rates to a record low after the EU referendum, has highlighted the role of consumers in propping up growth in recent months.

Its governor commented this week that “households appear to be entirely looking through Brexit-related uncertainties”. Mark Carney also flagged a pickup in consumer borrowing and signs that people were dipping into their savings to carry on spending.

Paul Hollingsworth, UK economist at the consultancy Capital Economics, said the retail sales figures might provide some relief on that front.

“The slowdown in spending growth should help to calm fears that low interest rates are driving an unsustainable credit-fuelled consumer boom. And we expect spending growth to lose some more pace over the coming year as inflation picks up and squeezes growth in households’ real incomes,” he said.

“But with interest rates set to remain low and the cost of servicing debt very manageable, as well as strong confidence by past standards, we expect spending growth to slow, rather than grind to a halt.”