Christmas sales at lowest in 20 years

Britain's retailers endured their toughest Christmas since the slump of the early 1980s as higher interest rates and a cooling housing market kept cost-conscious consumers away from the shops.

Bearing out the dire predictions from some of the UK's leading chains, the government's monthly snapshot of spending showed a 1% drop in activity during December.

Only online firms escaped a fall in sales, with all other retail sectors declining. Department stores said volumes were down 2.4% on November, clothing and footwear chains were down 1.7%, household goods fell 1.2% and supermarkets reported a 0.6% drop.

The British Retail Consortium said it was unsurprised by the weakness of December's trading numbers. Director general Kevin Hawkins said: "The trading environment this Christmas was tough and left most retailers disappointed and nervous about the challenging times ahead.

"There is no doubt that consumer confidence is fragile, and evidently people are cautious about spending. Uncertainty over the economy, the housing market and interest rates continues to take its toll," he added.

City reaction was muted, however, following the pre-emptive warning from Mervyn King on Thursday night that the Bank of England would not read too much into one month's figures.

Analysts said the Bank's governor, who had seen the data in advance, had clearly sought to defuse the impact of a poor set of figures. The annual growth rate in retail sales slid from 6% to 3.2% as a result of the December weakness, and the City said that without Mr King's intervention there would have been stronger pressure in the money markets for cheaper borrowing.

Interpreting month-on-month data can be tricky, warned the ONS, and a fuller picture of Christmas trading will be available when January's data has been collated.

Although most analysts agreed with the view of Mr King and the ONS that a true picture of retail sales will not emerge for a few months, some were saying there were clear signs consumers had tightened their belts this Christmas.

Vicky Redwood, of Capital Economics, said: "Sales rose by only 0.3% in the final quarter of the year, which questions the Bank of England's view that the downturn in the housing market will have little negative effect on spending."

Some analysts said despite price cuts in the run-up to Christmas, discounting had been less generous this year than in December 2003. The ONS said prices were 1.3% lower in December than a year earlier, compared with 1.5% lower in November. Generous bargains on offer in the January sales reflected retailers' need to attract customers.

A breakdown of the ONS figures also showed evidence of a migration to internet buying. Non-store retailing and repair - the category that includes the net - saw sales growth of 1% in December, and a rise of 9.8% over the past 12 months, the fastest for any sector of retailing, the ONS said.

Analysts noted that retail numbers over Christmas are always highly volatile since it is particularly difficult to make seasonal adjustments to the data as such a large proportion of annual trading occurs over the Christmas period.

The ONS said since this year's weak December data had shown the seasonal factor to be weaker than expected, it had revised sales growth for the same time last year to 1.6% from 0.9%. On a value basis and unadjusted for seasonality, sales growth in December was 17%, the lowest level since records began in 1961.