UK retail sales shrink unexpectedly in December, adding to glum data

By Andy Bruce and Suban Abdulla

LONDON (Reuters) -British retail sales fell unexpectedly in December, according to data on Friday that raised the risk of an economic contraction in the fourth quarter, adding to the challenges facing finance minister Rachel Reeves.

Retail sales, adjusted for the inclusion of the Black Friday sales at the start of the month, fell by 0.3% month-on-month in December after a downwardly revised 0.1% expansion in November, the Office for National Statistics said.

Sterling fell a quarter of a cent against the dollar after the data, dipping below $1.22, and gilt yields slumped - reversing a spike last week that briefly prompted comparisons with the market mayhem seen after former prime minister Liz Truss's 2022 "mini-budget".

In a BBC podcast on Friday, Reeves said she was tuning out her critics and would continue making difficult decisions in an effort to grow the economy.

Economists polled by Reuters had forecast a monthly increase in retail sales of 0.4%.

Friday's figures add to a run of lacklustre economic data since Reeves announced Britain's biggest tax rises since 1993 in her October budget, and boosted expectations for a Bank of England interest rate cut next month.

Retail sales for the fourth quarter as a whole fell by 0.8%, exerting a drag on economic growth of around 0.04 percentage points over the quarter, the statistics office said.

With growth already flatlining during the three months to November, the contribution of retail sales on its own could be enough to tip the economy into contraction for the fourth quarter, assuming no offsetting growth from other parts of the economy.

"Softening sales add to disappointment from November GDP earlier this week, suggesting the economy stagnated in Q4 or may even have contracted slightly," said Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics.

"The (BoE) have a window of opportunity to cut rates in February which we expect them to take."

Retail sales data are volatile and prone to revision, especially for December readings which have a tendency to be revised upwards, according to records dating back to 2019.

Excluding motor fuel, retail sales dropped by 0.6% on the month, the data showed.

"This was driven by a very poor month for food sales, which sank to their lowest level since 2013, with supermarkets particularly affected," senior statistician Hannah Finselbach said.

Total retail sales were 3.6% higher than a year ago, compared with a median forecast for 4.2% annual growth.

(Reporting by Suban Abdulla and Andy Bruce, graphic by Sumanta Sen; editing by William James and Christina Fincher)