Smaller stores helping to drive growth as retail sales hit a high

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Retailers reported their fastest sales growth in more than nine years last month, thanks to a strong increase in sales at smaller stores which helped to offset disappointing trading at retail giants like Marks & Spencer and Debenhams.

Retail sales jumped by 2.6 per cent in December to show an annual rise in volumes of 5.3 per cent, the fastest growth since October 2004, according to the Office for National Statistics.

This far outstripped economists’ forecasts for monthly growth of just 0.4 per cent – similar to November’s rate – and for sales to be 2.6 per cent higher on the year.

The ONS said that smaller stores with less than 100 employees reported annual growth in sales values of 8.1 per cent in December, compared with just 2.6 per cent growth for larger stores.

Howard Archer, chief UK economist at IHS Global Insight, said: “Retail sales volumes jumped 2.6 per cent month-on-month and 5.3 per cent year-on-year in December, which was way above expectations and a much stronger performance than had seemed likely given a far from spectacular December survey from the British Retail Consortium and somewhat mixed reports from individual retailers.

“The surge in retail sales in December following a muted overall performance in November and October indicates that consumers left much of their Christmas spending late in the hope of getting better late deals from retailers.

“It also implies that spending was strong at the start of the clearance sales as squeezed consumers looked to take advantage of genuine bargains.”

The upbeat figures will increase the chance that there was strong overall economic growth in the last three months of 2013.

They contrast sharply with numbers from the BRC, whose survey largely covers bigger stores.

Earlier this month the BRC said that despite signs of improving consumer confidence, shoppers spent just 1.8 per cent more in December than a year earlier, down from annual growth of 2.3 per cent in November.

Company results over the past couple of weeks have shown that retailers that tapped into consumers’ growing love of online shopping and must-have tablet computers, gadgets and cheap fashion enjoyed robust trading in an otherwise tough Christmas for the industry.

The figures are likely to help Britain’s economy record a strong end to 2013 when fourth-quarter gross domestic product data is released on January 28.

The UK economy grew by 0.8 per cent in the three months to September, well above its long-run average. The National Institute for Economic and Social Research estimated last week that growth slowed to 0.7 per cent in the fourth quarter,

However, this would still be enough for annual growth of 1.9 per cent, the fastest rate of growth since 2007.

Some economists are concerned about the longer-term prospects for British consumer spending, as it has partly been funded by households reducing how much they save, as wages have risen much more slowly than inflation.

Randal Casson, head of PwC’s retail team in Leeds, said: “Retail sales were healthy in December compared to a year earlier, driven by strong growth in online sales and smaller non-food stores.

“However, the picture for the fourth quarter as a whole was somewhat less positive, with retail sales volume growth up only 0.4 per cent on the previous quarter.”

He said that consumers are still spending, but there is an element of underlying caution about future prospects and individual retailers have seen very mixed results over the Christmas period.

“This is consistent with recent indications from other sectoral output data that, while the UK economic recovery continued in the fourth quarter, it may not have sustained the strong above trend GDP growth rates seen in the third quarter of the year.”

Dr Archer said that retailers were more aggressive in their discounting and promotions in December as they tried to get consumers to part with their cash.

“This will obviously have hit many retailers’ margins significantly,” he said.

“It should be noted that because of lacklustre overall sales in November and October, retail sales volumes growth in the fourth quarter of 2013 was limited to 0.4 per cent, which was down substantially from growth of 1.6 per cent quarter-on-quarter in the third quarter.

“Looking ahead, there is some uncertainty as to how robust consumer spending will be in the early months of 2014.”