UK retail sales dived before new government’s budget in October

British retail sales fell by much more than expected in October, according to official data that added to other signs of a loss of momentum in the economy in the run-up to the first budget of Prime Minister Keir Starmer’s new government.

Sales volumes dropped by 0.7 per cent from September, compared with a median forecast for a 0.3 per cent fall in a Reuters poll of economists.

The drop was the sharpest since June, when sales fell by 1.0 per cent from May. A monthly rise in sales in September was revised down to 0.1 per cent from a previous estimate of a 0.3 per cent gain.

Sterling fell by about a fifth of a cent against the US dollar immediately after the data before recovering.

The Office for National Statistics said retailers across the board reported that shoppers held back on spending ahead of the new government’s first tax and spending budget on Oct. 30.

Momentum in the economy weakened in the months ahead of the budget with gross domestic product edging up by only 0.1 per cent in the July-to-September period, according to official data published last week.

Finance minister Rachel Reeves spared individuals from her heaviest tax increases, which fell instead on employers, and there were some signs that Britons have overcome at least some of their nervousness since the budget.

A consumer confidence index, published by opinion polling firm GfK, rose in November and its measure of consumers’ willingness to buy expensive items improved.

Jacqui Baker, head of retail at accountancy firm RSM UK, said retail sales were expected to pick up with Black Friday deals in November and Christmas shopping in December.

“The budget didn’t deal a huge blow to consumers in the form of tax rises, plus interest rates continue to come down, and the American election is now out of the way, which should help with confidence and create a clear runway for Christmas spending,” Baker said.

The ONS said another possible drag on retail sales last month came from the school half-term holidays for England and Wales, which typically fall within the October data reporting period but did not this year.

Sales of clothing were particularly weak in October - down by 3.1 per cent after a 0.3 per cent rise in September.

The British Retail Consortium, representing the industry, has previously linked the fall to mild weather. The ONS said during the 12 months to October, sales volumes rose by 2.4 per cent, slowing from September’s 3.2 per cent rise and weaker than the median forecast in the Reuters poll for a 3.4 per cent increase.

Sales rose by 0.8 per cent over the three months to October, the weakest such rise since June and were 1.5 per cent lower than immediately before the coronavirus pandemic, reflecting in part the loss of spending power incurred by the jump in inflation caused by COVID and Russia’s invasion of Ukraine.

After falling sharply in recent months, inflation rose by more than expected in the 12 months to October.

Recent reports from big British retailers have been upbeat about the Christmas season.

Department store John Lewis said it was “quietly optimistic”, budget fashion retailer Primark said it expected good trading, while clothing and food retailer Marks & Spencer and supermarket Sainsbury’s forecast strong festive performances.

However, home improvement retailer Homebase fell into administration.

Britain borrowed more than expected in October, according to official data that showed the scale of the challenge facing finance minister Rachel Reeves who says she will fix the public finances as well as increase spending sharply.

In October alone, public sector net borrowing stood at 17.4 billion pounds ($22.0 billion), the Office for National Statistics said on Thursday.

That was higher than a median forecast of 12.3 billion pounds in a Reuters poll of economists.

It was the second-biggest October borrowing total since records began in 1993.

In the first seven months of the tax year, borrowing totalled 96.6 billion pounds, 1.1 billion pounds higher than in the same period a year earlier.

Meanwhile British companies have flagged an increase of about 820 million pounds ($1.04 billion) in costs related to a rise in employers’ social security contributions following Finance Minister Rachel Reeves’ maiden budget in October.

They also expect the increase in National Insurance Contributions (NIC) that employers pay and the minimum wages to fuel inflation.

British supermarket chain Sainsbury’s, which employs around 150,000 people, said it was facing headwinds of 140 million pounds from the national insurance change.

Marks & Spencer said the national insurance increase would cost it around 60 million pounds in its next financial year, which starts in April. A 6.7 per cent rise in minimum wage will add another 60 million pounds.

Agencies