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Do January Retail Sales offer false hope?

UK retail sales rebounded from their lows in the coldest December this century to beat economists' expectations by almost four times in January, according to the Office for National Statistics.

But experts have questioned the strength of the recovery, pointing to the challenging headwinds facing consumers over the next few months.

The stronger-than-expected jump of 1.9% from December shows that high street spending bounced back at the start of the year, much like the wider economy. Consensus among economists was for a 0.5% rise. Following the release, the pound was boosted against most major currencies and posted a 0.53% rise on the euro at 1.1948, as most were taken by surprise with the positive figure. But there are indications that following a strong start to the month, sales began to peter out.

Vicky Redwood, senior UK economist at Capital Economics, said: "We wouldn't want to take January's rise in sales as evidence that the consumer recovery is firmly back on track. Indeed, with real household incomes set to fall significantly this year, we find it hard to see consumer spending doing at all well." An underlying softness can be seen by looking at the retail sales figures on a three-month by three-month basis, which shows an increase of only 0.2%. Over December and January combined, sales only rose by 0.5%.

Howard Archer, chief European and UK economist for IHS Global Insight, said: "Just as December's 1.4% drop in retail sales hugely exaggerated the weakness in sales, so January's 1.9% jump substantially overstates the strength in sales." Sales were strongest at the start of the month, when consumers were taking advantage of discounts and rushing to beat the rise in VAT to 20%, which happened on 4 January.

But once the best of the clearance bargains disappeared and consumers faced the harsh reality of spending cuts starting to bite, there are signs sales tailed off. This is supported by the John Lewis weekly sales figures, which show muted year-on-year growth at the start of February. Excluding the impact of increased VAT, John Lewis sales for the week to 13 February show a 0.5% fall.

Archer said: "The markedly softer John Lewis sales in recent weeks is particularly notable, as the company has been clearly outperforming the retail sector as a whole for some time. "The figures suggest that consumers are becoming increasingly less prepared - or less able - to spend, as higher inflation and muted earnings growth squeezes their purchasing power," he added.

Source : Esther Armstrong - Interactive Investor

18 February 2011
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