Revival of retail sales ignites hope of a return to growth

Economists’ forecasts of a weak January on the high street are confounded by surge in spending
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British shoppers delivered a surprise boost to the economy in January, igniting hopes that the UK will avoid a return to recession this year.

Retail sales figures for January released by the Office for National Statistics (ONS) yesterday showed the strongest increase in sales volumes since the Royal Wedding last April.

"This is very good news," said Alan Clarke of Scotiabank. "It suggests at the very least that we will be growing by 0.5 per cent in the first quarter and probably faster than that."

The boost to sales was driven by sales of discounted furniture and sporting goods. An increase in mail order and internet shopping also made a strong contribution.

Economists had expected retail sales volume to contract by 0.4 per cent on December, as people tightened their belts after their impressive Christmas spending. But in the event, sales volumes rose by 0.9 per cent over the month. And the volume of sales was 2 per cent higher than January 2011.

Analysts said that heavy discounting by retailers probably played a role.

"Consumers generally are still facing major pressures and there were many good bargains to be had so this highly likely lifted sales," said Howard Archer of IHS Global Insight.

This view was backed up by the Arcadia Group owner Sir Philip Green, who said that retailers had been "exceptionally aggressive" in cutting prices in January.

The robust figures follow a string of other encouraging signs that the economy is picking up after contracting by 0.2 per cent in the final three months of 2011. Business surveys have shown an expansion this year across all the key sectors of the economy, from services to construction to manufacturing. And the Bank of England this week forecast the economy will be growing at a rate of 2 per cent by the end of this year.

The Bank's Governor, Sir Mervyn King, also said that the squeeze on incomes will continue to abate as inflation falls rapidly over the next 12 months. The latest CPI inflation figures showed a drop to 3.6 per cent, down from 4.2 per cent in December. The latest unemployment figures this week also showed a moderation in the rate of increase of the jobless count.

There are other encouraging signs from the retail sector. John Lewis said yesterday that its department store sales rose 4.1 per cent on the year. Also, a survey by Nationwide showed that British consumers' confidence rose in January to its highest level since last August.

Yesterday's robust retail figures contradict some gloomy recent reports from the high street. A survey from the British Retail Consortium earlier this month showed a 0.3 per cent fall in retail sales values in January, the second-worst performance for that month in 17 years. And a report from PriceWaterhouseCoopers this week said 14 stores a day on average closed across Britain in 2011. The accountants said that bookshops, men's clothing outlets and off-licences registered the most closures.

The FTSE 100 jumped by 10 points in early trade in the wake of the release of the surprisingly good retail figures. But some analysts recommended caution, warning that strong shopping sales did not necessarily mean that people are gearing up to increase their spending across the board.

"Unfortunately, the relationship between retail sales and consumption is so poor that we can say virtually nothing with any confidence about what overall consumption is doing at present," Alan Monks of JPMorgan said. "It is noteworthy that on the three prior occasions when retail sales have been this strong, consumption was either falling or showing only modest growth at best."

The ONS figures also showed that internet sales now account for some 12 per cent of total sales, up from 9 per cent a year ago.