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Feb 18, 2011
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Retail sales rebound in January but outlook uncertain

By
Reuters
Published
Feb 18, 2011

LONDON | Fri Feb 18, 2011 - Retail sales rebounded far more than expected in January after December's heavy snow, but failed to ease concerns consumers will be under pressure this year from government cutbacks and possible interest rate rises.


Shopper in United Colors of Benetton

Official data showed retail sales volumes jumped by 1.9 percent on the month -- more than three times faster than analysts had forecast -- following December's downwardly revised fall of 1.4 percent, the worst for any Christmas on record.

Sterling surged half a cent against the dollar to a two-week high on the data, which boosts expectations of a recovery in gross domestic product after a shock contraction in the final three months of 2010.

An uncertain economic outlook is posing a dilemma for the Bank of England which is trying to juggle the demands of reining in inflation, which at 4 percent is double its target, while not harming economic recovery by raising interest rates too soon.

Economists warned that it was too early to tell how consumers were facing up to a value-added tax rise last month and public spending cuts this year.

"While we expected there to be some clawback from December's dismal snow-hit retail sales, today's jump is a welcome surprise. But it is still far too early to conclude that consumers are weathering the storm," said Daiwa economist Hetal Mehta.

Economists expect consumer spending to be under pressure throughout 2011. High inflation and limited wage growth is likely to focus spending on essentials, and unemployment is forecast to rise due to job losses from public spending cuts.

Markets are also pricing in an interest rate rise as soon as May, saying the Bank will forced to act then to curb inflation and kick off monetary tightening which will further pressure consumers.

TAILING OFF

The Office for National Statistics (ONS) said it was hard to disentangle the effects of two successive annual rises in VAT, combined with unusually harsh winter weather in January 2010 and December 2010.

However, there was some anecdotal evidence that shoppers made major purchases before the VAT rise took effect on January 4, and that sales fell off thereafter -- a pattern also noted by trade body the British Retail Consortium.

"Our own figures show spending tailed off sharply as the month developed," BRC Director-General Stephen Roberton said.

"Slumping consumer confidence indicates concerns about jobs and finances are now reasserting themselves. February's results will be a better indicator of how things really are."

Department store John Lewis, a favourite of middle-class Britons, posted a fourth consecutive week of lacklustre sales, adding to evidence consumers are cutting back on spending.

Year-on-year, retail sales volumes were up by 5.3 percent in January, their biggest annual rise since November 2004. But last month's data was flattered by the comparison with sales in January 2010, when harsh weather heavily disrupted trade.

The Office for National Statistics said it was hard to disentangle the effects of two successive rises in VAT in January 2010 and January 2011, combined with harsh winter weather in January 2010 and December 2010.

However, there was some anecdotal evidence that shoppers made major purchases before the VAT rise took effect on January 4, and that sales fell off thereafter -- a pattern also noted by the British Retail Consortium.

ANALYST COMMENTS

ROSS WALKER, RBS

"These numbers are volatile at the best of times, we've obviously got big downward revisions to December, a much stronger January outturn. Overall the underlying position looks a little bit firmer than expected. Notable that the price deflator was unchanged so no obvious dents from higher inflation and those margin rebuilding that had been feared ahead of this number.

"So the underlying position is a bit firmer than we expected and pretty much in line with the trends that we'd seen before the snow related disruption.

"So if you look at the cash spend numbers, you're looking at three months growth of around 1 percent on the latest numbers... and that's about as much as the wholesale sector can do given the income sector. So a bit better than expected."

HETAL MEHTA, ECONOMIST, DAIWA

"While we expected there to be some clawback from December's dismal, snow-hit retail sales, today's jump is a welcome surprise. But is still far too early to conclude that consumers are weathering the storm.

"The retail sales figures are more prone to jumping around than many other indicators even without the volatility caused by December's weather. When one looks at growth on a three-monthly basis, it seems to us that the consumer sector remains incredibly subdued with sales up just 0.2 percent. And with the past week's unemployment figures highlighting the fragility of the labour market, the housing market continuing to weaken and real earnings being hit hard by high inflation, it seems inconceivable that consumer spending will act as the driving force of the economy over the near term."

PETER DIXON, ECONOMIST, COMMERZBANK

"A much stronger rebound in January than expected but the December figures were revised down as well. So net-net I'm not entirely sure they tell us an awful lot on their own. If you look at where we are relative to November, we're only 0.5 percent up, so it does indicate that the trends for sales remain fairly sluggish, and although we can probably expect some upside to Q1 consumption and therefore GDP as a consequence, I don't think we should get too excited until we have a couple of months of additional data, which I suspect will tell us that spending growth remains fairly weak."

PHILIP SHAW, INVESTEC

"The figures are much stronger than expected despite the downward revision to December's figures. Trying to discern underlying trends from retail sales data at this time of year is difficult normally given seasonal problems. But given the added problems of the snow in December and the VAT hike in January, things are more complicated, but certainly on face of it, the figures are much more robust than expected."

DAVID OWEN, JEFFERIES INTERNATIONAL

"The figure on the face of it is stronger, but then there were downward revisions to the December data and I haven't seen as yet what's happened to the deflator. So obviously that's also very key.

"A stronger figure on the day, you've got the impact of the sales, whether VAT went through on that month and so forth, so we'll have to look at the detail to give a considered view."

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