British Retail Sales Rise Unexpectedly

By Suban Abdulla

LONDON (Reuters) – British retail sales unexpectedly rose in September, according to official data published on Friday, contradicting signs of consumer pessimism about potential tax increases ahead of the new government's first budget later this month.

Sales volumes increased by 0.3% in September, surpassing economists' expectations of a 0.3% decline. With stronger gains in July and August, sales rose by 1.9% in the third quarter, marking the joint largest increase since mid-2021.

Telecoms and computers drove non-food sales, surging nearly 35% month-on-month in September, as reported by the Office for National Statistics. Last month, Apple unveiled its AI-focused iPhone 16 lineup alongside a sleeker Apple Watch and new AirPods.

"September’s rise … suggests that while households may be concerned about possible tax rises in the Budget on Oct. 30, those fears are not yet affecting their spending decisions," stated Alex Curr, UK economist at Capital Economics.

Following the data release, the pound rose by a third of a cent against the U.S. dollar. Finance minister Rachel Reeves will present her first plan for tax and spending at the end of October.

Warnings from the new Labour government regarding potential higher taxes and a tough economic outlook contributed to a plunge in consumer confidence, which fell to a six-month low in September.

Consumers Remain Cautious

British households continue to grapple with higher living costs, intensified by soaring energy prices after Russia's invasion of Ukraine in February 2022. However, the cost of living squeeze has slightly eased, with inflation dropping below 2% from an October 2022 peak of 11.1%, and wages growing faster than prices for several months.

Recent figures indicated a cooling in wage increases, raising expectations that the Bank of England might reduce borrowing costs at its Nov. 7 meeting, possibly again in December. The ONS noted that weaker growth in supermarket sales affected by bad weather and reduced spending on non-essential food items partly offset the significant gains in tech stores.

"While there has been some recovery in consumer sentiment after the general election, this improvement remains fragile and uneven," commented Lisa Hooker, PwC's leader of industry for consumer markets. Recent reports showed strong food sales from UK retailers, with Tesco raising its annual profit forecast and anticipating a strong Christmas season.

Nonetheless, consumers remain hesitant to spend on discretionary items. The head of Sainsbury's, which derives a quarter of its sales from non-food, told Reuters that shoppers are still nervous about larger purchases before the new government's first budget on Oct. 30.

According to the ONS, during the year ending September 2024, sales volumes rose by 3.9%, representing the largest annual increase since February 2022.