UPDATE 2-Shock drop in Oct retail sales hits UK recovery hopes

Thu Nov 15, 2012 7:26am EST

* Sales fall worse-than-expected 0.8 pct from Sept

* Data signals possible GDP contraction in Q4

* Sends sterling lower against dollar, euro

* Policymakers had hoped for rebound in consumer spending

By Olesya Dmitracova and Sven Egenter

LONDON, Nov 15 (Reuters) - UK retail sales fell in October as shoppers bought less food and clothing, puncturing a consumer spending revival that policymakers hoped would kick-start the economy heading into 2013.

Sales volumes fell 0.8 percent on the month for an annual rise of just 0.6 percent, the Office for National Statistics said on Thursday. Both numbers were the weakest since April and much worse than forecast, and sent sterling lower against the dollar and the euro.

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.

Britons have suffered the biggest drop in disposable incomes for more than 30 years as soaring food and fuel prices and higher taxes have eaten away at pay packets that have risen little or not at all.

The government and central bank had vested high hopes for the economy on consumer spending, and retail sales had risen 0.5 percent month on month in September.

But a rise in 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.

"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," Berenberg Bank's Wood said.

THE BIG SQUEEZE

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

The BoE has also signalled that the gap between price and wage rises is likely to persist, as it predicted that inflation would remain above its 2 percent target over the next 18 months.

On Thursday a report by grocer Asda, based on official data, showed that the amount of money households had left after paying taxes and buying basic goods rose last month, but much more slowly than in September.

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.

Between August and October, total sales inched up 0.2 percent from the previous three-month period.

On a more positive note, a survey by business lobby CBI showed late last month that retailers expected a pick-up in sales in November.

And on Sunday the country's biggest department store group John Lewis said Christmas shopping had got off to a strong start.

In expenditure terms, retail sales account for roughly one fifth of UK GDP.

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