U.K. Retail Sales Increased Unexpectedly in July

By Svenja O'Donnell

Aug. 21 (Bloomberg) -- U.K. retail sales unexpectedly rose in July as consumers shunned department stores in favor of discounted goods and snapped up mobile phones including Apple Inc.'s new model iPhone.

Sales gained 0.8 percent after falling 4.3 percent the month before, which was the biggest decline since at least 1986, the Office for National Statistics said today in London. Economists had expected a 0.2 percent drop for July, the median of 32 forecasts in a Bloomberg News survey showed.

Bank of England Governor Mervyn King said last week the economy faces a ``difficult and painful adjustment'' as falling house prices and rising inflation hurt consumer spending. On the year, shop sales rose 2.1 percent, the least since February 2006. Separate figures showed business investment fell.

``The weakness in the housing market and high inflation take a while to feed through,'' said Vicky Redwood, an economist at Capital Economics Ltd. in London. ``Retail sales figures will get worse later in the year.''

The pound briefly gained as much as 0.4 percent against the dollar after the report, trading as high as $1.8707 compared with $1.8585 yesterday before surrendering most of those gains. It was trading at $1.8624 at 12:25 a.m. in London.

Volatile Data

The central bank said last week that policy makers placed ``a rather greater weight than usual'' on survey data for retail sales because of the volatility of official figures.

``Few retailers will recognize this positive picture,'' Stephen Robertson, director general of the British Retail Consortium, the industry's lobby group. ``It's hard to see what could produce the sales-growth'' recorded in official figures.

Business investment fell 1.9 percent in the second quarter compared with the first, sharper than the 0.7 percent drop estimated by economists surveyed before the report. That report solidified expectations that the statistics office will revise down its estimate for gross domestic product for the second quarter when it releases those figures at 9:30 a.m. tomorrow.

``Businesses are absorbing a large proportion of the high input costs they have been facing, which indicates that profitability is likely to be severely dented, making it even harder for firms to find the finances for investing,'' said Hetal Mehta, senior economic adviser to Ernst & Young.

Survey Evidence

Other reports suggest consumers are starting to curb their spending. Sales in U.K. shops open at least a year fell an annual 0.9 percent in July, the British Retail Consortium, which represents 80 percent of stores, said in an Aug. 12 report.

Today's retail sales figures also showed revisions for previous months, which strengthened gains recorded in May and further depressed the drop in June. May's gain was revised to 3.9 percent from 3.6 percent. The drop in June now is estimated to be 4.3 percent instead of 3.9 percent.

``Consumer spending may well fall in the third quarter, which makes it quite likely we will see the first quarter of negative GDP growth since 1992,'' said David Tinsley, an economist at National Australia Bank in London, in an e-mailed note. ``There is still evidence that the pace of retail sales is slowing, though not as fast as some were expecting.''

The statistics office said ``other stores'' including jewelers and those that sell mobile phones, games, clocks and were the strongest of the five categories into which overall sales fall, gaining 2.8 percent. Non-specialized stores, or department stores, suffered a decline of 2.6 percent in July.

Phones and Markets

Apple Inc. sold 1 million iPhones in the three days after the debut of a faster model in July. A government statistician said he had no way of telling how much, if at all, that flattered this month's U.K. retail sales figures.

Carphone Warehouse Group Plc, Europe's largest handset retailer, said on July 31 fiscal first-quarter sales rose 2 percent as the company opened new stores. Discount retailers Aldi Group and Lidl won more of the U.K. grocery market in the last three months, according to Taylor Nelson Sofres Plc.

``The mix is as before, with bigger ticket, housing related sales doing badly and smaller ticket items doing well, supported by tourist sales in central London,'' said Geoffrey Dicks, an economist at Royal Bank of Scotland Plc. ``The U.K. consumer is down but by no means out.''

The figures complicate the picture for Bank of England policy makers, who have kept the benchmark rate at 5 percent since April as they weigh inflation pressures against the threat of slower growth. The retail sales deflator, a measure of cost changes in stores, rose 1.6 percent in July, the most since May 1998, the statistics office said.

GDP Report Due

Tomorrow, the statistics office probably will cut its estimate for second quarter economic growth to 0.1 percent from the 0.2 percent previously estimated, the median forecast of 34 economists surveyed by Bloomberg News shows. That would be the slowest pace since the aftermath of the last recession in 1992.

``With inflation at its upper limit and a calmer picture for retail sales, interest rates are likely to remain on hold until the end of the year,'' said Benjamin Williamson, an economist at the Centre for Economics and Business Research Ltd. ``Further storms down the line, however, could see interest rate expectations revised downwards.''

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.