UK retail sales bounce back firmly after three-month lull

UK retail sales in February proved much stronger than the market was expecting, sending sterling surging higher on Thursday but unlikely to prevent GDP growth from slowing in the first quarter.

The Office for National Statistics revealed that UK retail sales excluding auto fuel bounced back 1.3% in February after the revised 0.3% fall the month before, beating the consensus estimate for a modest 0.3% rise.

Monthly growth was seen across all store types, ONS said, but economists said a rebound after three months of falls.

Compared to the same month last year, retail sales jumped 4.1%, up from 2.1% in January and well ahead of the 3.2% forecast.

But volumes fell 1.4% in the three months to February compared to the three months to November, which was the weakest performance since the first quarter of 2010 and only the second fall since December 2013.

Retail deflators - the average store prices including fuel - accelerated to 2.8% year on year, up from 1.9% in January and the largest growth since March 2012, with an 18.7% rise from petrol stations a key element of the impact on consumers from rising inflation, but prices in other sectors accelerated as well.

The rise was driven in part by a recovery in big-ticket purchases, with sales at households goods stores picking up 3.7% month-on-month.

The figures will provide some reassurance that higher inflation has not brought growth in consumer spending to a halt, said Capital Economics' Paul Hollingsworth, but given that sales volumes had fallen for three successive months, some rebound had looked quite likely.

He also said it was worth noting that retail sales only account for around a third of household spending, and the early evidence on other areas of spending has been more encouraging.

"As a result, with credit conditions remaining supportive, and consumers’ confidence in the outlook for their own finances still quite strong, we expect overall household spending to slow this year, rather than collapse outright," Hollingsworth said.

Economist Howard Archer at IHS Markit said it still looked odds-on that retail sales volumes will contract appreciably over the first quarter, with March retail sales volumes needing to rise 3.2% month-on-month in order to deliver a flat quarter.

"The economy’s persistent resilience since last June’s Brexit vote has been largely built on consumers keeping on spending. With consumers now seemingly moderating their spending, the long anticipated slowdown in the economy looks set to materialize unless other sectors can make significantly increased contributions," he said.

Barclays agreed the retail rebound was not enough to prevent a slowdown in Q1, which would be carefully noted by the Bank of England's rate setters.

"GDP likely growing less than expected by the BoE... would contain some of the most hawkish members on the MPC," Barclays' Fabrice Montagne said.