Booming, said the CBI. Fading, says the ONS. What on earth is happening on the high street?

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"We should recognise the true meaning of the Christmas story will not be revealed until Easter, or possibly later," Mervyn King, the Governor of the Bank of England, famously once said, referring to the unreliability of retail sales data over the festive season. Never has that warning looked more apposite than after the release of yesterday's official figures for January.

The figures, from the Office for National Statistics, showed retail sales plummeted by 1.8 per cent last month, despite deep discounting in the New Year sales. The drop was the biggest for four years and dragged the year-on-year rate of increase down from 4 to 3.3 per cent.

With the exception of internet retailers such as Amazon, which enjoyed another month of sparkling sales, weakness was seen across the board. Clothes shops and shoe shops bore the brunt, with sales plunging by 4.4 per cent, probably partly because the unseasonably mild January weather made it hard to shift winter coats and boots. Household goods sales fared little better, with sales down by 4.2 per cent. In contrast, internet retailers saw their sales soar by 1.9 per cent, pushing the annual growth rate to 17.7 per cent, the strongest since records began 21 years ago. Shopping on the web has clearly come of age.

At face value, it appears consumers simply gave the thumbs down to bargains on offer during the January sales. It wasn't for the want of trying by retailers, who slashed prices to such an extent that they were on average 0.4 per cent lower than a year ago - the heaviest discounting since July last year.

News of the January wipe-out stunned the City, which had expected a modest rise in sales. Sterling dived more than a cent against the dollar and gilts rallied as traders scaled back their bets on higher interest rates. But it also left analysts scratching their heads after earlier reports had suggested the high street had started 2007 as it had ended 2006 - with the tills ringing loudly. The CBI had said sales surged at the fastest pace for two years in January, while the British Retail Consortium had claimed that retailers enjoyed their best New Year sales period for three years.

So why the discrepancy? And what's really happening on the high street? Some analysts dismissed the official figures as plain wrong. "The extreme volatility in the month-to-month retail sales comparisons render these data meaningless and flag major seasonal adjustment difficulties," Ross Walker, UK economist at Royal Bank of Scotland, said.

George Johns, UK economist at Barclays Capital, said: "The figures suggest that volume growth was not depressed by a lack of price discounting, but instead, by weakness in demand. Do we believe that conclusion? In short, no."

However, Helen Dickinson, head of retail at KPMG, explained the ONS and the BRC are essentially telling the same story but their headline numbers are calculated in different ways. The 1.8 per cent drop reported by the ONS relates to the month-on-month change is sales volumes - the number of goods actually sold. However, the BRC survey refers to the year-on-year change in sales values - the amount of money going through the tills. A look at the ONS value data reveals sales were up 2.8 per cent on an annual basis, very similar to the BRC's 3.1 per cent growth. As for the CBI's report, which looks at annual volume comparisons, it only covers the first two weeks of January and is seen by most analysts as an unreliable guide to the true picture.

Ms Dickinson also pointed out that the ONS figures are seasonally adjusted, to take account of spending vagaries over the Christmas period, while the BRC's are not. "The ONS is making all sorts of assumptions when it seasonally adjusts," she said. "You have to be really careful, because a tiny inaccuracy can throw the final result way off course."

So if we settle for the conclusion that sales were up by about 3 per cent year-on-year in January, we can say that trading was reasonable - unspectacular perhaps, but certainly not falling off a cliff.

"Retailing is still growing and is not a disaster, but it can't be described as strong out there," Ms Dickinson said. "The real problem is that a number of sectors, especially clothing, are suffering from deflation so they have to sell more to maintain their numbers in pound terms. A few years ago, value growth of 5 to 6 per cent was not unheard of, but now many are struggling just to stand still. The notable exception is the food sector, including supermarkets, which doesn't have a deflation problem because many consumers are trading up, buying more organic and premium lines."

It is also dangerous to generalise - some retailers are doing well, others badly. Christmas trading statements showed sales dropping at Woolworths and HMV, while Tesco and M&S performed well. Anecdotal evidence for January is similarly mixed. Richard Ratner, retail analyst at Seymour Pierce, said big-ticket items linked to the home, such as washing machines and flat screen TVs, were struggling, a reflection of cooling housing market. "Food is taking a greater and greater slug of the spend, which is likely to mean that life gets very difficult for the general retailers," he said.

Upmarket retailers, such as John Lewis, continue to pull away from the pack. Patrick Lewis, the group's supply chain director, said like-for-like sales in January were up just over 10 per cent on a year earlier. "While that was not quite as good as pre-Christmas, it was still strong," he said. "We lost some momentum as the Christmas gift trade came to an end, and the warm weather meant we did not sell as much heavyweight clothing, but electricals and domestic appliances stayed very strong."

Despite the health warning attached to yesterday's figures, most economists stood by the market's initial hunch that they were bad news for economic growth and, while not sufficient to prevent the Bank of England from lifting rates again, would probably ensure that 5.5 per cent was the peak. Karen Ward, UK economist at HSBC, said the data showed consumers were feeling the pinch and were only being tempted into the shops by discounting. "This will temper the Bank's inclination for higher rates," she said.