Retail spending rise boosts hopes UK can avoid double-dip recession

Bargain-hunting consumers eased government fears of a double-dip recession on Friday with the sharpest monthly increase in retail spending since the Royal Wedding last spring.

Shares rose and the pound strengthened after the release of data from the Office for National Statistics showing that the volume of spending in the high street and online rose by 0.9% in January.

The increase – which represented the first back-to-back rises in December and January for eight years – was greeted with incredulity in the City, which had been braced for a 0.4% fall in retail sales volumes.

Analysts said that while the strength of consumer activity sharply reduced the chances of a second successive quarter of negative growth it was likely that spending would fall back over the coming months.

David Kern, chief economist at the British Chambers of Commerce, said: "The retail sales figures for January were far stronger than expected. After the December increase, which was affected by heavy pre-Christmas discounting, most analysts expected a small fall in January. This increase shows that the economy is slowly improving and supports our view that GDP will return to positive growth in the first quarter of the year."

The Office for National Statistics said internet shopping and sales of household goods had been especially strong last month, but clothing and footwear – where many retailers cut prices before Christmas – saw weaker trading conditions.

Last month's increase followed a 0.6% rise in December and meant that retail sales volumes in the three months to January – a better guide to the underlying trend than one month's figures – were up by 1.3% on the previous quarter.

Some analysts cautioned that the heavy seasonal adjustment of the raw spending figures at the turn of the year made interpreting the data difficult. Even so, the government will be relieved that spending appears to be holding up despite the squeeze on incomes caused by high inflation, rising unemployment, a weak housing market and the crisis in the eurozone.

Retail sales account for less than half of total consumer spending, and do not include the purchase of cars or eating out. The ONS said that its measure of inflation in the high street – the annual retail sales deflator – fell to 2.2% last month, its lowest level since November 2009. Ministers are hoping that lower inflation will boost real income growth during the course of 2012.

Helen Roberts, analyst with the pollsters GfK NOP, said: "Our own data shows that there has been a slight improvement over the last couple of months in how consumers feel about their financial situation. When you combine this with an extended sales season in December and January, when people tend to do a lot of their major purchasing for the year, these figures are perhaps not that surprising.

"It's worth remembering that while an upbeat mood may exist in the new year it doesn't necessarily mean that it will last beyond January. Our research suggests that people plan to spend less this year across a number of areas, including big ticket items. When you combine this outlook with downbeat economic and unemployment figures, this may be the high point of the next few months for retailers."

Nida Ali, economic adviser to the Ernst & Young Item Club, said: "These figures are a bolt from the blue and are at odds with the much softer survey data. The 0.9% monthly increase in retail sales was unexpected, especially on top of the strong rise in December. There is always a big question mark over the December and January figures because of the huge seasonal effects, so we do treat these figures with a degree of caution.

"Heavy discounting still seems to be the main driver for the rise in sales, with retailers continuing to slash prices to sustain market share. This is clearly an unsustainable strategy and it is difficult to see these sort of growth rates being sustained."

Snow business

Britain's biggest department store chain John Lewis said sales rose last week as the heavy snow prompted a flurry of internet shopping.

The employee-owned retailer said on Friday its sales rose 4.1% to £52.3m in the week to February 11.

"The start of the week saw the cold wind of winter bite with snow across much of the east and south of the country but overall we had a positive week — an endorsement of our multi-channel approach as customers chose to keep warm and shop online," said director David Barford.

"The start of the week had the biggest snow impact with a 22.3% drop on last year. The remainder of the week saw some great bounce backs."