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May 20, 2010
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Clothing lifts retail in April, fiscal threat looms

By
Reuters
Published
May 20, 2010

(Reuters) - Britons stepped up purchases from clothing chains and department stores last month, lifting total retail sales by more than expected, but shoppers could soon be clamping their wallets shut in the face of a fiscal squeeze.



Official data on Thursday 20 May showed retail sales volumes including automotive fuel rose 0.3 percent in April, slightly better than analysts' forecasts of a 0.2 percent rise, after an upwardly revised increase of 0.5 percent in March.

On the year, sales rose 1.8 percent in April, unchanged from March's pace and in line with forecasts.

The figures suggest that consumer demand held up well as Britain recovers from its deepest recession since World War Two, despite high unemployment and uncertainty throughout the month about the outcome of the May 6 national election.

"Overall, sales volumes are grinding up slowly, which given the rise in VAT, the strength of fuel prices and the general election, isn't a bad result all things considered," said Philip Shaw, economist at Investec.

But some analysts doubted if sales growth would be sustained later in the year when the new Conservative and Liberal Democrat government starts cutting spending and raising taxes to rein in record public borrowing.

"With debt-laden households being squeezed by falling real wages, and a major fiscal tightening on the way -- probably including a further rise in VAT -- the outlook for consumers, and hence retailers, remains far from rosy," said Jonathan Loynes of Capital Economics.

Value-added tax returned to 17.5 percent in January after a 13-month reduction to 15 percent, and many economists expect finance minister George Osborne will raise it to 20 percent in an emergency budget on June 22.

"We expect the VAT hike to come in some time in the Autumn, so that will probably tend to accentuate the deteriorating volumes/price split we are seeing at the moment," said Ross Walker, economist at RBS.

Consumer price pressures were already clear in April's figures, echoing a rise in April's consumer price index to 3.7 percent, and suggesting that retailers are focussing on repairing margins after the 18-month downturn.

The retail sales deflator, a measure of inflation, rose to 2.8 percent on the year from 2.5 percent in March, with the deflator for the clothing sector rising to its highest since September 1998, at -0.3 percent on the year.

But the figures did little to alter the view the Bank of England will keep interest rates at a record low 0.5 percent until the end of this year at least to shield the economic recovery from the downward impact of any fiscal tightening.

MIXED FORTUNES

Thursday 20 May's figures were mixed: strength in clothing, textiles and footwear -- which accounts for 12 percent of total sales -- and department stores offset static food sales and weakness in the household goods and mail-order sectors.

That chimed with recent corporate results from retailers, who have said they are bracing for tough conditions ahead.

Department store chain John Lewis, whose weekly sales figures are viewed as a barometer of consumer demand, recorded strong gains throughout April and the first part of May.

By contrast, supermarket chain Asda posted its first quarterly drop in sales in four years in the first quarter.

Excluding fuel, retail sales rose 0.1 percent on the month and were up 3.0 percent on the year. Fuel sales rose 1.5 percent on the month after a 2.6 percent increase in March.

Still, analysts were confident that retail sales would at least support economic growth in the second quarter, after a lacklustre 0.2 percent expansion in the three months to March.

"This is no guarantee that overall consumption for the current quarter will show the same trend. But the April retail sales release adds to the sense that growth in general is set to accelerate in Q2 after a setback at the start of the year," said Allan Monks, economist at JP Morgan.

(Reporting by Fiona Shaikh and David Milliken; Editing by Ruth Pitchford and Toby Chopra)

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