Retail sales add to recovery in UK

LONDON: British retail sales barely grew in July as cash-strapped consumers cut back on spending, underscoring the risks for the UK's already fragile economic recovery.

A weakening labour market and rising inflation are expected to continue to restrain consumer spending and, together with signs that key British export markets are slowing, increase the risk that the UK economy will fail to pick up after nine months of near stagnation.

Sales volumes, including automotive fuel sales, grew by just 0.2 percent last month, and were unchanged from a year ago, data from the Office for National Statistics showed on Thursday. Analysts had forecast a rise of 0.3 percent both on the month and from a year earlier.

"Ongoing high, and (in the near term) rising inflation is likely to continue to erode household purchasing power, while the recent weakening of the labour market will probably also provide a further blow to spending," said ABN Amro economist Joost Beaumont, referring to the surprise rise in unemployment in July.

"Together with the euro zone debt crisis impeding growth in the UK's main export market, it is likely that overall economic growth will be very weak in the second half of the year."

The housing market a creator of wealth for many Britons before the financial crisis also looks unlikely to help boost consumption any time soon as data from the Council of Mortgage Lenders showed that gross mortgage lending was 6 percent lower in July than a year ago.

Sterling fell briefly versus the dollar and the euro after the retail sales data as the numbers added to the views that rising interest rates were not on the cards for a long time and the Bank of England may even opt to pump more money into the economy should growth stay weak.

The UK economy grew by only 0.2 percent in the second quarter and surveys among manufacturers and service firms have indicated a moderate rebound.

Britain's car manufacturers, however, are still benefiting from strong exports, and car production raised by 1.3 percent in July from a year ago, the SMMT industry body said.

The central bank has warned about the risks from the euro zone debt crisis and the financial market turmoil and policymakers have intensified the debate about fresh asset purchases.

Business surveys have pointed to weak sales in July and many retailers expect a further worsening.

Britons have cut back on spending as soaring prices, higher taxes and slow wage increases eat into their budgets and uncertainty about job security weighs on sentiment.

Britain's high street is already suffering from consumers' reluctance to spend and a number of well-known retailers such as wine seller Oddbins, home improvement firm Focus DIY and furnishings retailer Habitat have collapsed, while others have closed stores and shed staff.

Copyright Reuters, 2011