Retail sales show signs of life on books and sportswear increases

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Retail sales dipped last month amid evidence of less discounting and as shoppers stayed away from London after the July bombings, but the underlying picture remains positive, according to official figures.

Sales volumes fell by 0.3 per cent in July from the previous month, less than analysts had expected and following a fall of 1.2 per cent in June. That took the annual growth rate to 1.8 per cent from 1.2 per cent in June. Yet the Office for National Statistics judged that the underlying pattern was for sales to continue the "gradual upward trend seen since March this year".

Sales rose 0.7 per cent in three months to July, the highest quarterly increase since November. The annual growth rate for the period fell to 1.3 per cent, due to strong sales this time last year.

Philip Shaw, the chief economist at Investec, said: "There is a degree of uncertainty about the outlook for high street activity, but our view is that we are likely to see some strengthening from the dire situation at the turn of the year."

All retail sectors posted falls last month except food stores, which saw sales rise by 0.3 per cent, and sportswear retailers and bookshops, which reported a 1 per cent gain overall. The ONS said bookstores benefited from the launch of the new Harry Potter book. Department stores experienced the steepest drop, of 2.9 per cent, after some brought their summer sales forward to June.

Prices were on average 0.6 per cent lower than they were a year ago, the same as in June, but up from the 1 per cent price falls seen in the spring, suggesting that retailers are not discounting as heavily as in the past despite tough trading conditions.

The Bank of England, which cut interest rates by a quarter of a percentage point to 4.5 per cent this month to kick-start sluggish household spending, said this week it saw signs of a pick-up in consumer spending, though downside risks remained.

Mark Richards, at Lombard Street Research, said: "Consumer spending should post a mild recovery in the second half of the year."

Meanwhile, mortgage lending by British banks slowed sharply last month to the weakest level in three and a half years years, according to the British Bankers' Association. Underlying mortgage lending rose by £3.7bn after a £4.7bn increase in June.

The BBA said potential homebuyers may have put off getting a mortgage in July in anticipation of the Bank of England's widely predicted August interest rate cut.

The Council of Mortgage Lenders reported only a slight slowdown in gross mortgage lending to £25.2bn last month. Its director, Michael Coogan, said: "The figures indicate that the housing market has started to stabilise at a new lower level last seen in 2003."