(Bloomberg) — UK retail sales posted the biggest monthly rise in almost three years, adding to hopes that the economy has turned a corner after slipping into recession last year.
The volume of goods sold in stores and online gained 3.4% in January, the most since April 2021 when the country was emerging from lockdown, the Office for National Statistics said on Friday. Excluding the pandemic, it was the biggest increase in records going back to 1996. Economists had predicted a 1.5% rise.
The rebound brings some relief to the retail sector after a dire December when sales plunged by 3.3%, a drop that helped push Britain into a shallow recession. It adds to survey evidence showing a pickup in economic momentum as the worst cost-of-living crisis in a generation eases.
“Today’s release was stronger than expected and suggests the drag from higher interest rates on consumer spending is fading fast and points to the economy soon moving out of recession,” said Joe Maher, economist at Capital Economics.
The ONS said many retailers reported being boosted by January discounts. Sales rose across the sector during the month, with clothing stores the only exception. Supermarket food contributed most to the sharp rebound, which returned overall sales volumes to their November 2023 levels, though they remain below where they were before the pandemic.
While sales fell 0.2% in the three months through January, it was strongest quarterly reading since August last year.
“Household goods stores, sports shops and department store retailers were amongst those reporting robust trading due to January sales promotions. A fall in prices at the pump also meant a solid month for fuel sales,” said Heather Bovill, deputy director for surveys and economic indicators at the ONS.
Signs of an upturn have left the Bank of England wary about cutting interest rates too soon, with several officials pointing to evidence of sticky inflation in the labor market and services sector. Markets are expecting the first reduction in August.
The latest retail sales figure prompted traders to trim bets on how many cuts the BOE will deliver in total this year. Two quarter-point reductions are baked in, with the odds of a third falling to 90% on Friday after being fully priced Thursday. Those odds were as low as 40% earlier in the week after stronger-than-forecast wage figures.
The pound, which initially strengthened following the sales data, is now down 0.1% at $1.2584 and on course for a third weekly drop. UK government bonds are little changed.
What Bloomberg Economics Says…
“While we expect the pressure on consumer spending to continue to ease this year, headwinds remain. The economy is weak with elevated interest rates eating into household budgets. Around 1.4 million more households are expected to see an increase in repayments this year as fixed-rate mortgage deals expire, according to our estimates. That will increase the proportion of disposable income taken up by monthly loan payments — denting demand in the economy.”
—Niraj Shah, economist. Click for full REACT
Prime Minister Rishi Sunak is counting on a feel-good factor from falling inflation, cheaper mortgages and a payroll tax cut in January to rescue the governing Conservative Party’s fortunes.
Sunak’s problems mounted on Friday after the opposition Labour Party overturned significant Conservative majorities to win two parliamentary seats, denting the prime minister’s hopes of staying in power at a general election expected in the second half of this year.
Consumer spending was one of the weak spots that helped to tip the UK into a technical recession in the second half of 2023. While households have been squeezed by the cost-of-living crisis and surging mortgage rates, the pressure on their finances may ease in 2024.
Wage growth is now outstripping inflation and mortgage rates have cooled from their peaks last year. More relief is on the way with Chancellor Jeremy Hunt signaling more tax cuts in his March budget, the minimum wage due to rise almost 10% in April and the BOE expected to pivot to cutting rates as it switches its attention away from fighting above-target inflation to supporting the economy.
“The UK economy is clearly struggling, and although today’s report shows an increase in retail sales last month, there are still significant challenges ahead,” said Liz Edwards, money expert at personal finance comparison site finder.com. “The downside to retail sales increasing is it could deter the Bank of England from lowering the base rate any time soon, particularly following the stubborn inflation figures released earlier this week.”
–With assistance from James Hirai, Constantine Courcoulas and Aline Oyamada.
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