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Last updated: March 27, 2014 5:30 pm

UK retail sales rebound more than expected in February

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Shoppers walk along Oxford Street in London, Britain, 19 November 2009. UK retail sales in October rose at the fastest annual pace since May 2008, government figures have shown, 19 November. Data from the Office for National Statistics (ONS) showed sales in October were up 3.4 per cent from a year ago©EPA

UK retail sales grew strongly in February, boosting hopes that the economy is powering ahead in the first quarter of the year.

Sales volumes were above market expectations, up 3.7 per cent compared with the previous year and 1.7 per cent compared with January. Analysts had been expecting a 0.5 per cent monthly increase.

Retail sales are only a small part of overall household spending, which includes housing, transport and services, but are an important indicator of consumption.

The monthly data have been very volatile recently. December had robust growth of 2.6 per cent. This was followed in January by a contraction of 1.5 per cent. Thursday’s figures revised this fall down to 2 per cent.

At the time, the December figure was the biggest monthly rise since 2008, while January’s data had the biggest monthly decline since May 2012, reflecting the difficulty of seasonal adjustment around the peak Christmas shopping period. For this reason, the majority of economists focus on the year-on-year figures, or the three-month trend.

Alan Clarke of Scotiabank said that retail sales were “flying”, with items relating to the housing market doing particularly well; for example, department store sales were up almost 6 per cent from the year before.

But he also warned: “It is hard to see how this pace of growth can be maintained for much longer. After all, real income growth has only just turned positive.”

Consumer spending has been boosted by slowing inflation, improving pay settlements and signals from the Bank of England that it intends to keep interest rates at a record low at least into next year. But after many years of inflation outstripping pay growth, the increased spending has been funded by households dipping into their savings.

The Office for Budget Responsibility is forecasting that consumer spending growth will outstrip disposable income growth in the near term, with households saving less.

It forecasts the saving ratio – the proportion of income that households do not spend – will fall from 5 per cent to about 3 per cent in five years’ time. This and business investment, but not exports, are the main reasons behind its 2.7 per cent growth forecasts for this year.

Samuel Tombs at Capital Economics said the strong figures indicated the outlook for retail spending was bright and the sector was likely to add more to GDP growth than in the fourth quarter last year.

“Consumers are still loosening their purse strings which provides some reassurance that the economic recovery has not lost pace in the first quarter,” he said.

Chris Williamson, chief economist at data company Markit, said that with real incomes forecast to start rising again, consumers will play an important part in the economic recovery.

“A concern is that the spectre of higher interest rates grows with every new piece of stronger-than-anticipated economic data, but what’s encouraging is that the recent sales growth is being achieved despite households having brought forward their expectations of when the Bank of England will need to start raising interest rates,” he said.

For the first time since September 2009, there was a reduction in the average price of goods sold. The deflation of 0.2 per cent compared with February 2013 was largely caused by a drop in fuel prices.

Average weekly spending on retail goods in February was £6.6bn compared with £6.3bn the previous year and £6.4bn in January.

The figures are based on a monthly survey of 5,000 retailers for the Office of National Statistics, which includes all those that employ 100 people or more.

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