The volume of goods sold in stores and online gained 3.4% in January, the most since April 2021 when the economy was emerging from lockdown, the Office for National Statistics said on Friday. Excluding the pandemic, it was the biggest increase in records going back to 1996. Economists had predicted a 1.5% rise.
The rebound brings some relief to the retail sector after a dire December when sales plunged by 3.3%, a drop that helped push Britain into a shallow recession. It adds to survey evidence pointing to a pickup in economic momentum as the worst cost-of-living crisis in a generation eases.
“Today’s release was stronger than expected and suggests the drag from higher interest rates on consumer spending is fading fast and points to the economy soon moving out of recession,” said Joe Maher, economist at Capital Economics.
The ONS said many retailers reported being boosted by January discounts. Sales rose across the sector during the month, with clothing stores the only exception.
Supermarket food contributed most to the sharp rebound, which returned overall sales volumes to their November 2023 levels, though they remain below where they were before the pandemic.
While sales fell 0.2% in the three months through January, it was strongest quarterly reading since August last year.
“Household goods stores, sports shops and department store retailers were amongst those reporting robust trading due to January sales promotions. A fall in prices at the pump also meant a solid month for fuel sales,” said Heather Bovill, deputy director for surveys and economic indicators at the ONS.
Signs of an upturn have left the Bank of England wary about cutting interest rates too soon, with several officials pointing to signs of sticky inflation in the labor market and services sector.
Markets are fully pricing in the first quarter-point cut in August. The pound reversed earlier losses after the data, rising as much as 0.1% to US$1.2606. The currency is still headed for a third weekly drop.
Prime Minister Rishi Sunak is counting on a feel-good factor from falling inflation, cheaper mortgages and a payroll tax cut in January to rescue the governing Conservative Party’s fortunes.
Sunak’s problems mounted on Friday after the opposition Labour Party overturned significant Conservative majorities to win two parliamentary seats, denting the prime minister’s hopes of staying in power at a general election expected in the second half of this year.
Consumer spending was one of the weak spots that helped to tip the UK into a technical recession in the second half of 2023. While households have been squeezed by the cost-of-living crisis and surging mortgage rates, the pressure on their finances may ease in 2024.
Wage growth is now outstripping inflation and mortgage rates have cooled from their peaks last year. More relief could be way with Chancellor Jeremy Hunt signalling more tax cuts in his March budget and the BOE expected to pivot to cutting rates as it switches its attention away from inflation to supporting the economy.
“The UK economy is clearly struggling, and although today’s report shows an increase in retail sales last month, there are still significant challenges ahead,” said Liz Edwards, money expert at personal finance comparison site finder.com.
“The downside to retail sales increasing is it could deter the Bank of England from lowering the base rate any time soon, particularly following the stubborn inflation figures released earlier this week.”