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Business News

Alarm as food sales slump

Rising prices and weak demand caused sales volumes in Britain's food stores to slump more than 3% over the last year.

In reporting a bigger-than-expected drop in month-on-month volumes of 1.4% for the whole retail sector, the Office for National Statistics (ONS) said supermarkets, electrical goods and DIY stores appeared to be bearing the brunt of the squeeze on household budgets.

It said food store volumes fell by 3.5% year-on-year during May, although the value of sales rose by 1.7% after retailers lifted prices by 5.3% to offset inflationary pressures.

Economists expressed alarm at the latest gloomy survey, although they pointed out the headline monthly figure of minus 1.4% was distorted by the previous month's boost from the weather and royal wedding.

Vicky Redwood, an analyst at Capital Economics, said the outlook for the rest of the year was poor.

She said: "We expect this trend to worsen as households respond to the intensifying squeeze on their real pay. We continue to think that overall household spending will drop by about 1% this year."

The food store figures were the worst monthly performance for three years and a resumption of the monthly falls seen in the 14 months prior to April.

Household goods and clothing sales also fell especially sharply in May, with furniture, electricals goods and DIY volumes 6% lower compared than last year, although the comparative period was boosted by pre-World Cup spending.

Grocery giants Sainsbury's and Tesco both warned this week that higher petrol prices were having an impact on consumer spending, with Sainsbury's adding that its cheapest Basics brand was the fastest-growing at the store chain, signalling a move by customers to keep their costs down.

The ONS added that the amount of money spent on food compared to other items fell to 42p in May from 43p in April.

Richard Lim, an economist at the British Retail Consortium, said: "A return to sunny weather through the summer may provide another lift to retail sales, but it will take more than the holiday season to fix the underlying problem of low consumer confidence."

May's decline slashed year-on-year volume growth to just 0.2% from 2.4% in April, a figure which was revised lower today from 2.8%.

The British Chambers of Commerce (BCC) said the report was a clear sign that any move to raise interest rates would be a "mistake" given the pressures facing businesses and consumers and with the Government's fiscal austerity programme continuing to bite.

It is forecasting that GDP will grow by only 0.3% in the second quarter of 2011, much less than official and City analysts are predicting.

BCC chief economist David Kern said: "More must be done to sustain growth and empower businesses to create jobs, export and invest. Productivity has fallen significantly since 2008 and recouping these losses must be a key policy priority."