CORRECTED-UPDATE 1-Shock drop in UK retail sales in Oct hits recovery hope

Thu Nov 15, 2012 5:28am EST

(Removes reference to Asda sales. The Asda data was from the second quarter and was not released on Thursday as stated.)

By Olesya Dmitracova and Sven Egenter

LONDON Nov 15 (Reuters) - British retail sales posted a surprise fall in October as shoppers cut back on food and clothing purchases, reducing the chances consumers will boost the economy in the final quarter.

Sales volumes including automotive fuel fell 0.8 percent on the month to give an annual rise of 0.6 percent, the Office for National Statistics said on Thursday. Both numbers were the weakest since April and worse than economists' consensus forecasts.

Food shops reported the biggest monthly decline in sales since November 2011.

"I think a contraction in GDP is on the cards for the fourth quarter," said Rob Wood, economist at Berenberg Bank.

"Retail sales had improved through 2012 as the fall in inflation eased the squeeze on households, but as inflation goes up that puts the brakes on retail sales for now."

Sterling fell against the dollar and the euro after the release clouded the growth outlook for the economy.

In a more positive sign, car manufacturing lobby SMMT said vehicle production grew 6.4 percent on the year in October, taking the rise in the first 10 months of 2012 to 8.4 percent.

THE BIG SQUEEZE

Britons have been suffering the worst decline in their incomes for more than 30 years because soaring food and fuel prices and higher taxes have eaten away scant pay rises. Many have cut back on non-essential spending.

Meanwhile, electrical retailer Comet fell into administration earlier this month, becoming the latest high-street victim of Britons' reluctance to spend.

The ONS said retail sales excluding fuel fell 0.7 percent on the month and were 1.1 percent higher than in October 2011.

Total retail sales inched up by a meagre 0.2 percent between August and October compared to the previous three months.

On Wednesday Bank of England Governor Mervyn King warned the economy might shrink again in the final three months of the year, having just exited recession in the third quarter.

Policymakers have been pinning great hopes on a revival of consumer spending, but a rise in British inflation to a five-month high of 2.7 percent in October put that in doubt because wages are rising at a much slower pace.

The gap between price and wage rises is likely to persist, with the Bank of England predicting inflation would remain above its 2 percent target over the next 18 months.

However, some retailers have not written off the crucial Christmas trading period yet: on Sunday the country's biggest department store group John Lewis said Christmas shopping had got off to a strong start.

And a survey by business lobby CBI showed late last month that retailers expected a pick-up in sales in November.

For a graphic on British retail sales, click link.reuters.com/hax99s (Additional reporting by David Milliken. Editing by Jeremy Gaunt.)

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