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UK retail sales rise at sharpest rate since January 2011

U.K. retail sales offered a fresh sign of a strengthening economic recovery Thursday, rising at their sharpest annual rate in more than two years in July as the hot weather buoyed demand for summer products, official figures showed.

The Office for National Statistics said retail sales rose 1.1% on the month in July and were up 3% on the year, driven by sales of summer clothes, food and alcohol as Britons enjoyed a heat wave. The ONS said the annual rise in sales was the steepest since January 2011.

The data provided the latest signal that the U.K. economy is on the mend after several years of near stagnation. Chris Williamson, chief economist at data firm Markit, said the figures add to the likelihood that the economic recovery will have continued at a firm pace in the third quarter.

The market reacted strongly to the better-than-expected figures, with sterling rising to $1.5587--its highest level against the dollar since June 19. The yield on the 10-year government bond, known as a gilt, hit a two-year high of 2.69%.

Thursday's data comes a week after Bank of England Gov. Mark Carney outlined a major shift in the central bank's policy framework, vowing to keep interest rates at record lows at least until the U.K. jobless rate falls to 7%. The policy, called forward guidance, is designed to spur greater spending by households and businesses that may have been worried about the potential for higher borrowing costs amid a burgeoning economic recovery. It also is aimed at ensuring that interest rates in financial markets don't rise too fast as the economy gathers pace and thereby slow the recovery.

"Ironically, the strong data and market reaction to it (higher short-term interest rates and sterling) is creating a headache for the BOE as it tries to make its forward guidance credible," said Simon Wells, an economist at HSBC. "To us, the market moves seem overdone: the Monetary Policy Committee is in no mood to tighten for a long time yet."

Economists said lower inflation, an improving labor market, rising house prices and a pickup in consumer confidence should help support retail sales in coming months. They also cautioned that falling real wages--pay adjusted for inflation--could drag on the sector.

Wage growth in the U.K. is failing to keep pace with increases in the price of goods and services, meaning Britons' spending power is being eroded. This has serious implications for the economy's prospects because consumer spending makes up around 60% of the country's economic output.

"With real pay set to continue falling into next year and households eating into their savings, the resources to sustain growth in sales still look lacking," said Martin Beck, U.K. economist at Capital Economics.

U.K. food retailers said the spell of hot weather during July had a positive impact on sales. Upmarket supermarket chain Waitrose, part of the John Lewis Partnership, reported a record 14.3% rise in sales excluding gasoline for the week to July 20, boosted by strong demand for ice cream and barbecue meats.

"Many of our ranges enjoyed their biggest-ever week of sales, showing the extent to which warm-weather lines continue to drive our business performance," said Tom Athron, Waitrose's finance director.

Outdoor retailer Kingfisher PLC, owner of the B&Q chain of home improvement stores, also credited the hot weather for a 2.5% increase in U.K. same-store sales in the 10 weeks to July 13, pointing to high demand for barbecues, garden hoses and outdoor furniture.

Source : 4-Traders

15 August 2013
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