The London stock market fell sharply after official publication of weak retail results.

Consumers showed caution in the run-up to Christmas with high street sales falling last month, according to the Office for National Statistics (ONS).

London shares reversed early gains, falling 43.3 points to 5,234.9, after the release of figures showing a 0.1% drop in British retail sales figures for December from November.

The drop showed an unexpectedly marked slowing of the economy, dragging down retail-related stocks.

Consumer caution

The downturn suggests that consumers are wary about spending, perhaps in the wake of five quarter-point interest-rate increases since Labour came to power in May.

Although furniture sales rose strongly, sales of computers and photographic equipment in December were unusually low, according to the ONS.

Normally such goods do well in December, and there are two likely explanations for the difference - either shoppers had used windfall gains from building societies in the summer to buy new equipment, or they were waiting for keener prices in the January sales.

Although the volume of sales fell slightly last month in comparison with November's figure, they were still 5.3% higher than a year ago, suggesting that retailers generally had a good Christmas.

Sales for the whole of 1997 were 5.4% higher than in 1996 - the highest rate of growth since 1990.

Good news for home-owners?

The retail sales figures, combined with a range of other indicators, could well spare home-owners with mortgages from another interest-rate rise in February, according to Marian Bell, UK Treasury economist for the Royal Bank of Scotland.

But she added that the December figures were very difficult to estimate accurately and a better picture would emerge early in the year.

Bank of England: fears of rising wages

The Bank of England's November Inflation Report suggested growth of about 4% in the second half of last year. But consumption has been revised downwards since then.

Alongside industrial production figures, growth was looking more like 3.5% for the second half of the year, Ms Bell said. The only real worry for the Bank of England was the recent average earnings figure which, if sustained, would represent inflationary pressures.

"The risk [of higher interest rates] comes later in the year if we don't slow down as fast as the Bank expects," she said.
 

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