U.K. September Retail Sales Drop as Downturn Deepens

By Svenja O'Donnell

Oct. 23 (Bloomberg) -- U.K. retail sales fell in September as rising unemployment and the specter of a recession prompted British shoppers to curb spending.

Sales declined 0.4 percent on the month after rising 1.1 percent in August, the Office for National Statistics said today in London. Economists forecast a 0.7 percent decline, according to the median of 33 estimates in a Bloomberg News survey. On the year, sales increased 1.8 percent, the least since February 2006.

DSG International Plc, the U.K.'s largest electronics retailer, said today that a sales drop persisted in the past two months. Bank of England Governor Mervyn King told business leaders this week that Britain probably faces a recession after the nation's worst banking crisis since World War I.

``The U.K. consumer will hold back,'' said Amit Kara, an economist at UBS AG in London, who formerly worked at the central bank. ``I see a negative growth rate for next year and unemployment going up. Things are looking pretty bad.''

The pound rose as much as 0.2 percent against the dollar after the report showed a smaller than forecast sales drop. It traded at $1.6307 as of 10 a.m. in London. The U.K. currency reached a five-year low of $1.6147 yesterday after King said that a recession ``seems likely.''

The central bank cut the benchmark interest rate to 4.5 percent in a surprise joint global action on Oct. 8. All nine policy makers voted in favor, saying that there was evidence consumer spending was weakening and that the economy ``deteriorated substantially,'' minutes of the decision showed.

Electrical Items

Sales at non-food stores led the decline on the month, falling 1.1 percent, the statistics office said. Household goods shops reported a 2 percent drop, led by electrical items, while textile, clothing and footwear sales slipped 2.3 percent.

DSG said that revenue slid 7 percent at stores open at least a year in the 24 weeks ended Oct. 18. The company plans to cut capital spending as consumers rein in spending on computers, washing machines and appliances.

Food sales rose 0.3 percent on the month. They fell 0.4 percent from a year earlier, and declined 0.1 percent in the third quarter, the first drop since records began in 1986, the statistics office said.

London's workforce will shrink this year for the first time since 2004 and the slide will extend through 2009 as the global financial crisis hurts banks and builders, according to the city's economic forecast. Unemployment rose to the highest level in almost two years in September, and house prices fell at the fastest annual rate in at least six years this month, Rightmove Plc said Oct. 20.

Consumer Squeeze

``The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,'' King said in his speech on Oct. 21 in Leeds.

Inflation reached 5.2 percent in September, the fastest pace in at least a decade. King said that the risks to consumer prices shifted ``decisively'' to the downside in the past month. The annual price deflator, a measure of cost changes in shops, showed a 1 percent annual increase in September, the statistics office said today.

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