Market News

By Irina Anghel

(Bloomberg) -- UK retail sales declined more than expected in October, as uncertainty over Chancellor of the Exchequer Rachel Reeves first budget prompted consumers to hold back spending. 

The volume of goods sold in stores and online fell 0.7% month on month, the Office for National Statistics said on Friday, compared with the 0.3% decline expected by economists. The figures showed how warnings from Reeves and Prime Minister Keir Starmer about the difficult decisions needed in the run-up to the Oct. 30 budget announcement dented economic activity. Retail sales had increased 0.3% in September.  

“Retail sales fell back in October following three months of growth,” ONS senior statistician Hannah Finselbach said. “The fall was driven by a notably poor month for clothing stores, but retailers across the board reported consumers held back on spending ahead of the budget.”

The spending plan — including some £40 billion ($50 billion) of tax increases, much of it from employer payroll levies — continues to reverberate through the economy. Consumer confidence improved slightly in the immediate aftermath of the budget, GfK said in separate data released earlier Friday, although the report noted that the gauge remained well below levels in August, when Starmer ratcheted up fiscal warnings. 

Once-robust economic growth has cooled since the July election, as relatively high interest rates continue to drag on output in the Bank of England’s fight to hold down inflation. An unexpected contraction of 0.1% in September, which economists also attributed to budget worries, held quarter-on-quarter growth at 0.1%.  

Such uncertainty has overshadowed improving real incomes, easing borrowing costs and cooler inflation. The risk is that increased household caution could put an artificial limit on consumption, which accounts for two-thirds of GDP.

Consumers got another reason to hold back spending on Friday, when energy regulatory Ofgem announced that its price gap would rise by another 1.2% in January, the first back-to-back increase since the height of the energy crisis. A previous increase of 10% in October was blamed for pushing inflation back above the bank’s 2% target. 

The retail sales data is one of several fresh indicators detailing the budget’s impact on the economy. The S&P Global’s purchasing mangers’ index will be published at 9:30 a.m. in London. The gauge slowed to 51.7 in October, with anything above 50 indicating expansion. 

Sales volumes fell across most categories, according to the ONS data, with unusually warm weather delaying purchases of winter clothing and households holding out for Black Friday discounts in November to shop for big-ticket items.

A release from the British Retail Consortium showed shopping figures disappointed in October, while the Confederation of British Industry reported a decline in its sales indicator due to budget anxieties.

Still, Bloomberg Economist Niraj Shah said sales would rebound as the Christmas shopping season ramps up. 

“Some caution may persist as financial pressures are exacerbated by rising energy bills, but we still expect consumer spending to pick up,” Shah said in a note. “The removal of uncertainty around the budget, seasonal concessions, the November rate cut, and, ultimately, an increase in real wages are likely to bolster sales ahead.”

(Updates with GDP data in fifth paragraph.)