U.K. June Retail Sales Drop Most Since at Least 1986

By Jennifer Ryan

July 24 (Bloomberg) -- U.K. retail sales dropped in June by the most since at least 1986 as accelerating inflation and the slowdown in economic growth prompted consumers to cut spending.

Sales fell 3.9 percent after rising 3.6 percent in May, which was the biggest increase since the data series began more than two decades ago, the Office for National Statistics said today in London. Economists forecast a 2.6 percent drop, the median of 30 estimates in a Bloomberg News survey showed.

Bank of England policy makers cited weaker retail sales surveys as a signal of slowing economic growth at their decision this month, minutes released yesterday show. Falling house prices and a jump in credit costs have squeezed consumers just as the fastest inflation in at least a decade prevents the central bank from cutting the main interest rate from the current 5 percent.

``Consumers are facing a slower economy, rising unemployment and price increases from food and energy costs,'' said Philip Shaw, chief economist at Investec Securities in London. ``Consumption will be flat over the second half of the year.''

The pound fell as much as 0.2 percent against the dollar and the euro after the report and traded at $1.9873 and 78.91 pence per euro as of 10:07 a.m. in London.

On the year, sales rose 2.2 percent, the least since February 2006, the statistics office said. Sales in the food and non-food categories both fell by the most since records began. The non- specialized stores component, which includes department stores, was the only one to show an increase on the month.

M&S, JJB

Marks & Spencer Group Plc, Britain's biggest clothing retailer, said on July 2 that sales dropped the most since 2005 and ousted its top food executive after his unit had the worst quarter in at least a decade. JJB Sports Plc, the U.K.'s second- largest sporting-goods retailer, said today that a sales decline persisted in the second quarter.

The sales drop on the month offsets a jump in May which was predicted by none of the 37 economists in a Bloomberg survey and which took the Bank of England by surprise. Policy maker Andrew Sentance said in a July 17 interview that the sales data was puzzling.

Consumers face a squeeze on finances from record food and energy prices. Gains in commodities pushed the consumer price index to 3.8 percent in June, the fastest in at least 11 years and more than the government's 3 percent upper limit.

The retail sales deflator, a measure of cost changes in stores, showed a 0.5 percent annual price increase last month, the first gain since June 2007, the statistics office said.

Rate Disagreement

Policy maker Timothy Besley cast the first vote in a year for a rate increase this month, minutes of the July 10 decision published yesterday show. Seven of his colleagues kept the rate unchanged and David Blanchflower wanted a cut, citing the risk of a sharp slowdown.

``Weakening surveys of retail spending,'' as well as slower- than-forecast expansion in the first quarter, suggested economic growth was probably weaker than the bank predicted in May, the minutes showed. Retail sales in shops open at least a year fell 0.4 percent in June compared with a year earlier, the British Retail Consortium said on July 15.

Economic growth will slow to a 1 percent annual pace in the first quarter of 2009, the weakest since 1992, the Bank of England predicted on May 14. The statistics office will publish second- quarter data tomorrow.

A weaker residential property market has also discouraged spending. After tripling in the past decade, house prices fell in June from a year earlier by the most since 1992, HBOS Plc, the nation's biggest mortgage lender, said this month.

Banks nursing more than $467 billion of credit losses from the U.S. subprime mortgage market collapse are tightening U.K. lending. Home-loan approvals last month fell to the lowest since at least 1997, the British Bankers' Association said yesterday.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net