Weak sales spark 'double-dip' recession fears in UK

Weak sales spark 'double-dip' recession fears in UK

Today’s worse-than-expected retail sales for January have capped a poor week for the British economy and heightened fears of a dreaded “double-dip” recession.

Analysts were braced for a weak number due to the heavy snowfall which struck the UK and deterred shoppers, as well as the return of VAT to 17.5% pushing up prices.

But the 1.8% sales fall is the biggest monthly decline since June 2008 and - even with the exceptional factors involved – offers little signal that households are ready to spend their way out of recession.

“While we have been warning for some time of a tough spring for retailers, the scale of today’s slump is shocking,” said Jorg Radeke, of the Centre for Economics and Business Research.

Inflation also soared above target in January to 3.5% and the UK borrowed over the month for the first time since records began in 1993.

This has added to concerns over the dire state of the public finances and the tax hikes and spending cuts which must surely follow to address the deficit.

Although the country’s anaemic 0.1% growth in the final quarter of 2009 could be revised higher when the latest official estimates are published next week, fears now are focused on the prospects for the first three months of this year after the dreadful start to 2010.

Jonathan Loynes, chief European economist at Capital Economics, said of the retail sales: “At the very least, January’s figures provide a very weak platform in the first quarter.

“Even very strong monthly gains in sales of 2% in both February and March would leave a small fall in the first quarter compared to the 0.5% increase in the fourth quarter of last year, raising the chances that the overall economy succumbs to a double-dip.”

British Chancellor Alistair Darling’s decision to defer belt-tightening until 2011 won public support from 60 economists today, but official growth estimates for the first quarter of 2010 are due at the end of April.

These could act like a hand grenade in the climax of a heated general election battle – with potentially fatal consequences for Labour’s message of economic recovery.

The snowfall is likely to exacerbate the downward pressure on output growth from rising VAT, as well as the looming withdrawal of measures such as the car scrappage scheme, which ends in March.

While interest rates remain at record lows and are likely to stay there until the end of the year, the Bank of England also edged down growth forecasts in its quarterly inflation report last week, when it said the UK economy was still “bumping along the bottom”.

IHS Global Insight economist Howard Archer warned: “The upside for consumer spending – and hence overall economic growth – will be limited in 2010 as households face still very challenging conditions including high unemployment, low earnings growth, high debt levels and January’s VAT hike.

“Meanwhile, still serious concerns about the economic outlook and jobs are likely to maintain consumers’ desire to improve their personal finances.”

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