U.K. Retail Sales Unexpectedly Fall Most in 11 Months

U.K. Retail Sales Unexpectedly Fall Most in 11 Months

Jan. 18 (Bloomberg) -- U.K. retail sales unexpectedly dropped in December by the most in 11 months as higher borrowing costs and falling house prices curbed consumer spending.

Sales declined 0.4 percent from November, when they rose by the same amount, the Office for National Statistics said today in London. Economists forecast a 0.2 percent increase, the median of 31 estimates in a Bloomberg News survey showed. On the year, sales climbed 2.7 percent, the least since September 2006.

The pound dropped after the report, which showed that an interest-rate cut in December failed to encourage Christmas spending amid the worst housing market slowdown since Britain's last recession in 1992. Kesa Electricals Plc, the owner of Comet electronics stores in Britain, said yesterday that sales growth slowed during the fourth quarter.

``The consumer is feeling the headwinds from the financial and housing sectors,'' Richard McGuire, an economist at Royal Bank of Canada in London, said in a Bloomberg Television interview. ``This will provide added support in favor of a widely expected rate cut in February.''

The pound fell as much as 0.6 percent against the dollar and 0.6 percent against the euro, after the report as investors increased bets on lower rates. The currency traded at $1.9580 and 74.67 pence per euro as of 10:07 a.m. today in London.

The Bank of England reduced its benchmark rate by a quarter point to 5.5 percent in December to help stem the fallout from the U.S. subprime mortgage market collapse, which has pushed up market borrowing costs.

Slowing Growth

A Bloomberg News survey of Jan. 4 showed most economists forecast the rate will fall to 4.75 percent by the end of 2008. The economy grew 0.5 percent in the fourth quarter, the weakest pace in two years, the National Institute of Economic and Social Research estimates.

Sales at non-specialized stores, the category which includes department stores, fell 4.3 percent on the month, the biggest drop since January 2007, the statistics office said. Overall non-food sales dropped 0.9 percent, outweighing a 0.1 percent increase for food retailers.

Jean-Noel Labroue, chief executive officer of Kesa, said yesterday that market conditions were ``difficult, particularly in the U.K.'' Retailers Tesco Plc and Marks & Spencer Plc this month called for interest-rate cuts to help consumers, who have 1.4 trillion pounds ($2.8 trillion) of debt.

Lower Spending

Falling property prices may also discourage shoppers. Real- estate professionals said December was the housing market's worst month since the aftermath of the last recession in 1992, the Royal Institution of Chartered Surveyors said on Jan. 16.

Consumers may still pare spending as banks curb loans and the economy starts to slow. ``While only a minority of households may be credit constrained, they are probably sufficient to depress household spending somewhat,'' Bank of England Deputy Governor John Gieve said yesterday.

Jobs growth was still the strongest in a decade in the quarter through November, and unemployment fell to the lowest since 1975 last month. HMV sold 45 percent more video games during the Christmas season as the overall U.K. market expanded 30 percent in unit terms, the company said yesterday.

Retailers also cut prices to attract shoppers. The implied deflator, which shows annual inflation in shops, was 1.2 percent lower than a year earlier, the biggest drop in three months.

Gieve said yesterday that policy makers face ``difficult judgments'' on interest rates as they weigh risks to growth against the threat of inflation, which exceeded the 2 percent target for the past three months.

BLOOMBERG