UK retail sales slide in first quarter after March snow

By David Milliken and Alistair Smout

LONDON (Reuters) - British shoppers stayed home in March as they felt the chill from the 'Beast from the East', leading to the biggest quarterly fall in retail sales in a year and weighing on first-quarter economic growth, official figures showed on Thursday.

Unusually cold and snowy weather caused retail sales volumes to drop by 1.2 percent compared with the month before, the Office for National Statistics said, a bigger fall than most economists polled by Reuters had expected.

Looking at the quarter as whole, sales dropped by 0.5 percent compared with the final three months of 2017 - the biggest fall since Q1 2017. The ONS said this was likely to lop 0.03 percentage points off first-quarter GDP growth, which other analysts forecast at around 0.3 percent.

Sterling fell to a one-week low after the data, which caps a week where wages rose more slowly and inflation dropped quicker than expected, raising doubts about how far the Bank of England will raise interest rates this year.

However, few economists are willing to ditch their predictions that the BoE will increase rates next month for only the second time since the financial crisis, even if odds on a further rate rise this year have been lengthening.

"If the past is anything to go by, much of the spending lost during the bad weather will be made up at a later date. As such, we expect sales volumes to rebound in April," Ruth Gregory of Capital Economics said.

The data may not cut much ice with the Bank of England, which last month said it expected the wintry weather to slow overall economic growth temporarily but not affect an underlying picture that pointed towards higher interest rates.

The BoE is likely to stick to its view that the labour market is primed for a pick-up in wages, as unemployment is at a 42-year low, leading to stronger consumer demand later this year as inflation continues to fall.

FUEL DOWN, ONLINE UP

The ONS said automotive fuel sales fell particularly sharply in March, but that department stores reported strong online demand, especially in the run-up to Mother's Day and Easter.

It said there was anecdotal evidence that food shoppers switched away from supermarkets to smaller local stores.

Britain's economy underperformed its rivals last year as higher inflation - caused by the fall in the pound since June 2016's Brexit vote - hurt the consumers' spending power, though forecasts for a sharp downturn proved too pessimistic.

Official data earlier this week showed British inflation fell to 2.5 percent from 2.7 percent, its lowest in a year and below BoE forecasts.

The gauge of inflation used in the retail sales data, the retail price deflator, sank to its lowest since January 2017 at 1.9 percent in March.

The ONS said that retail sales in cash terms recorded their weakest annual growth since June 2016, expanding by just 3.0 percent. In volume terms, sales rose 1.1 percent, the ONS said, versus expectations of a 2.0 percent rise in a Reuters poll.

British retail chains - whose profits typically hinge on cash spending rather than volumes - have had a tough few months.

Earlier on Thursday department store Debenhams warned about its full-year profit outlook for the second time in four months after its first-half profit more than halved.

Major flooring retailer Carpetright said last week it would seek creditor approval for a restructuring plan to close nearly a quarter of its stores, and Toys R Us UK and electrical store Maplin closed their doors before.

But others such as online fashion retailer ASOS and discount clothing chain Primark have done better.