UK retail sales bounce as consumers shrug off Brexit worries

UK shop sales jumped more than expected last month, as households engaged in a bit of retail therapy in the face of the political and economic uncertainty.

Retail sales grew 1.0% in January compared to the month before, the Office for National Statistics revealed, bouncing back from the 0.7% drop in December that was revised up from the 0.9% fall originally reported. The performance was well ahead of the 0.2% rise that had been expected.

Compared to January last year, sales grew 4.2%, stepping up from 3.1% in December and much better than the 3.4% that economists had pencilled in.

Excluding the 1.3% month-to-month decline in automobile fuel sales, retail sales rose 1.2% month-on-month, rebounding from the 1% fall in December, while year-on-year this measure was up 4.1% versus 2.9% the preceding month and 3.2% consensus forecast.

The ONS head of retail sales, Rhian Murphy, said: “Retail sales returned to growth, with increases across most sectors. Clothing stores saw strong sales, luring consumers with price reductions with food sales also growing after a slight dip over Christmas.”

Volumes in clothing and footwear stores grew by a sharp 2.1% on the month and 5.5% on the year amid the January sales, with a year-on-year price fall of 0.9%.

After the general slowdown in food store prices through 2018, volumes in January returned to the strong growth up 1.2% on the month -- the strongest since May -- and 3.2% on the year.

Online sales as a total of all retailing decreased to 18.8% in January, from the 19.8% reported in December.

"January’s jump in retail sales shows that most households have maintained a happy-go-lucky mentality, despite the fraught political situation," said economist Samuel Tombs at Pantheon Macroeconomics.

"While consumers’ confidence is down, this reflects rather fuzzy expectations that Brexit might be costly eventually. Right now, households’ real incomes are being supported by low inflation, a decade-high rate of nominal wage growth and solid employment gains. Low confidence will prompt consumers to hold back from buying cars, booking holidays and moving home, but the high street will be protected."

Tombs said sales are likely to fall back somewhat in February, with recent rises in domestic producer and import prices for food suggesting retailers will need to force through price increases over the coming months.

He also predicted that the decline in fuel sales is likely to be the start of a bigger reversal.

Thomas Pugh at Capital Economics agreed that consumers were shrugging off Brexit uncertainty "for now".

"Of course, unless a Brexit deal is signed soon, sales could weaken over the rest of Q1. However, if a no deal Brexit is avoided, consumers should be in a good position to ramp up spending in the second half of the year."

He said this rare nugget of good news for the economy should be tempered by a "number of reasons not to get carried away", as the jump in clothing sales was "probably driven by stronger discounting" that is unlikely to be continued and that household goods volumes fell by 4.4% on the month, "which indicates that Brexit uncertainty and the subdued housing market are still having an impact on sales of the bigger items".

"That said, stronger retail sales do suggest that consumers are more resilient to the Brexit uncertainty than we had feared and with inflation continuing to fall back – note that the retail sales deflator fell from 0.6% in December to just 0.4% – and pay growth on the up, there should be scope for consumer spending growth to gather some momentum further ahead once a Brexit deal has been finalised."