Weak retail sales over Christmas

Marks & Spencer was one retailer with disappointing Christmas sales

Consumers reined in their Christmas spending last year, according to official figures.

UK retail sales unexpectedly fell 0.4% in December compared with November, the Office for National Statistics said.

The figure for the last three months of 2007 rose 0.4% compared with the previous three months, which is down from 1.0% growth in November.

The figures are likely to boost expectations of another cut in interest rates from the Bank of England.

Its rate-setting committee has already cut its key rate once, from 5.75% to 5.50% in December.

"Surely this is enough to cement a February rate cut and more cuts thereafter," said Vicky Redwood at Capital Economics.

This will be a difficult year even if it goes well Evan Davis, BBC economics editor Read Evan's thoughts in full

However, the BBC's economics editor Evan said that a dip in consumer spending may not be an entirely negative thing, as long as it is handled in a controlled manner.

"Consumers are saving well below their long run average," he explained.

"We probably need a consumer slowdown of some kind, and we need to wean our economy off the growth that depends on consumers constantly increasing their debt-to-income ratios.

"But while a slowdown is desirable, an abrupt or dislocating halt to all spending is not," he said.

Heavy discounting

According to the ONS figures released on Friday, general mixed retailers, which includes department stores, had their worst December for 13 years.

Increasing concerns about the economic outlook are likely to further encourage consumers to tighten their belts Howard Archer, Global Insight

Marks & Spencer was one of the biggest casualties in the area, with like-for-like sales down 2.2% in the last three months of 2007.

The fall in sales volumes came despite heavy discounting.

"A sixth successive month of significant discounting in December indicates that retailers believe that there is an increasing need to offer incentives for consumers to shop and are becoming less confident in their pricing power," said Howard Archer at Global Insight.

He predicted that consumer spending will continue to soften this year.

"Increasing concerns about the economic outlook are likely to further encourage consumers to tighten their belts," he said.

Online sales

The figures came on the day that an industry survey suggested that online retail sales for the last three months of 2007 had risen by 50%.

Internet sales between in the period hit £15.2bn, up from £9.61bn a year earlier, with electronics and clothing doing well, Capgemini said.

The figures from the Office for National Statistics also confirmed the findings of the survey by the British Retail Consortium (BRC).

The BRC said it had been the worst Christmas for three years and that like-for-like sales had only increased by 0.3%.

Like-for-like sales exclude the effects of new store openings.

The BBC's economics editor said that the poor figures from the High Street were a signal that the UK would not completely escape economic problems.

"I'm afraid that this will be a difficult year even if it goes well," he explained.

"There's little point in hoping that government or consumer spending can change that. Even if we put ourselves in the lap of the gods, we won't avoid some kind of slowdown in 2008."