Retail sales stall raises fears of triple-dip recession

http://www.guardian.co.uk/business/2012/nov/06/retail-sales-triple-dip-recession

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Hopes the economy is on the road to recovery have been dampened by figures showing retail sales stalled last month and growth in Britain's services sector almost ground to a standstill.

Britons shied away from spending on big-ticket and luxury items in October, leading to the weakest sales growth in almost a year, according to the British Retail Consortium (BRC). Meanwhile, expansion in the UK's services sector – which accounts for three-quarters of UK GDP – slowed to a crawl as new business failed to make up for projects completed during the month.

Chancellor George Osborne had seized on news last month that the economy emerged from double-dip recession, growing by 1% in the third quarter of 2012, as evidence that his policies had put Britain "on the right track". But early signs for the fourth quarter now suggest the economy could shrink again, raising the prospect of a triple-dip recession.

Rob Wood, an analyst at Berenberg Bank, said: "With manufacturing output suffering from weak exports and domestic demand, and the service sector flirting with contraction, a fall in GDP in the fourth quarter now looks most likely."

The BRC said like-for-like sales fell 0.1% last month, compared with October last year. It was a crushing blow after September's figures, which showed growth of 1.5%, had raised hopes Britons had got used to austerity and were out spending again. Averaged out over the past three months, like-for-like sales growth was only 0.4% a month – the worst in 11 months.

Stephen Robertson, director general of the BRC, said: "Unfortunately it looks like the modest sales revival we saw in September was something of a false dawn. The disappointing figures are a reminder of the difficult economic realities many are still facing. Falling consumer confidence means people are limiting spending to essential items and are cautious about committing to big-ticket and discretionary buying."

Rising prices helped drive total food sales up by an average of 3.4% but, stripping out the impact of inflation, volumes of food sales were stagnant. The worst hit sector was home accessories, which the BRC said was not considered an essential "for the consumer with little spare money".

Household spending overall dropped by almost 3% in October, according to Visa. Steve Perry, commercial director at Visa Europe, said: "The strong growth witnessed in recent months went into decline. October's figures will take some of the gloss off recent optimism as they are a timely reminder that household finances remain under pressure and consumers are exercising caution."

A forward-looking survey of the services sector suggests this sluggish growth is likely to continue in the fourth quarter. The Markit/CIPS Purchasing Managers' Index for the services sector dropped to 50.6 last month from 52.2 in September, only just above the 50 mark that separates growth from contraction. It is the slowest pace of growth in almost two years and significantly below analyst expectations of a much smaller decline to 52.

Andrew Harker, economist at Markit, said: "Although there are signs of improvements, [companies surveyed] still referred to the fragility of both demand and confidence among clients. The expectation among firms is for activity to improve over the coming year, but the road to full economic recovery still looks to be a long one."

The gloomy survey is likely to reignite the debate over whether the Bank of England will expand its quantitative easing programme this week. Howard Archer of IHS Global Insight said: "While we just about still lean towards the view that the Bank of England will hold off from more QE for now and monitor how the economy is developing and what impact the Funding for Lending Scheme is having, it is looking an extremely tight call."

While new orders in the services sector grew in October – largely due to overseas demand – they did so at a slower pace than in September and companies said incoming new business did not make up for the completion of existing projects.

For the second month running, employers in the services sector cut jobs in October. Business costs rose but companies were reluctant to pass them on to customers as a result of strong competition. Companies did, however, remain relatively optimistic, with 42% of those surveyed forecasting that service sector activity will improve over the next 12 months.