High streets facing 'spending paralysis' after weak July sales

Retailers have warned of a "spending paralysis" on the high street if confidence is not revived in the wake of the global slowdown and sovereign debt crisis, after the sector delivered anaemic sales growth in July.

While underlying sales rose by 0.6 per cent last month, after a fall by the same amount in June, the increase was largely driven by hefty discounting in the fashion and grocery sectors, according to a survey by the British Retail Consortium and KPMG.

Indeed, when shop price inflation of 2.8 per cent and January's rise in VAT to 20 per cent are accounted for, sales volumes actually fell.

Total retail sales grew by only 2.5 per cent in July, despite the boost from new stores and extensions, and Stephen Robertson, the director-general of the British Retail Consortium, said: "Overall conditions remain very difficult forretailers. When you take into consideration inflation and January'sincrease in VAT, 2.5 per cent growth effectively means people are buying fewer goods."

The BRC said it continued to support the Government's deficit reduction programme – particularly in light of the US losing its AAA credit rating last week – but it called yesterday for the Government to stick to its promises on issues such as reducing red tape and introducing a fairer system for setting business rates.

"Growing fears of a global economic slowdown and a sovereign debtcrisis have sent shockwaves through financial markets," Mr Robertson said. "Policymakers in Europe and the US must act to implement a co-ordinated and credible strategy to reduce public sector deficits while supporting growth. Business and consumer confidence needs to be restored quickly before spending paralysis sets in."

The improved retail performance in July was led by food, clothing and footwear. Joanne Denney-Finch, the chief executive of IGD, the trade body for the food sector, said: "July's food and drink sales show some encouraging improvement, partly due to better weather towards the end of the month. The new wave of fuel-related promotions by supermarket retailers may have succeeded in bringing forward some purchasing."

But the BRC pointed out that food sales growth continued to outperform non-food, discretionary purchases, particularly big-ticket items. While higher food price inflation was helping to drive growth, Mr Robertson also said the "unprecedented number of promotions" would hit profit margins.

"Sales of non-food [items] barely grew, though clearance events helped summer clothing in particular," he said. Extended clearance sales helped clothing rise above levels seen a year ago, following two months of decline. Womenswear was the star performer in fashion retailing, while growth in menswear and childrenswear was slower than in June.

Reflecting the slowdown in consumer spending, Habitat UK, the furniture and homewares retailer, and Jane Norman, the young fashion specialist, were among businesses that entered administration in June.