UK retail sales get surprise boost from hot weather and World Cup

By Suban Abdulla

LONDON, July 24 (Reuters) - British retail sales rose unexpectedly in June as shoppers increased their spending on air conditioning and clothing, official data showed on Friday, adding to signs of a pickup in the economy spurred by warm weather and the soccer World Cup.

Sales volumes in June rose 1.0%, the Office for National Statistics (ONS) said, well above economists' forecasts for a 0.3% fall in a Reuters poll.

Sales rose 1.2% in monthly terms in May, while April's sharp 1% drop was revised to a fall of 0.7%.

The ONS said the share of internet sales rose to its highest since April 2021 at 29.4% in the three months to June as the heatwave discouraged shoppers from visiting high streets.

Sales for retailers who do not have a physical store, including online retailers and market stalls, jumped by 4.4% month-to-month as households tried to stay cool with purchases of fans in one of the hottest Junes on record.

IMPROVED SENTIMENT

The data chimed with a GfK survey of improved sentiment among consumers, helped by hopes about Britain's new prime minister, Andy Burnham, despite concerns about the war in Iran.

Burnham took office this week and has made easing the cost of living for households his top priority. His government has announced a cut in tax on electricity bills and a lower cap for bus fares.

British inflation slowed in June, as motor fuel and food prices fell during a brief ceasefire in the Gulf conflict, while the downturn in the jobs market has shown signs of stabilising.

Sterling strengthened against the U.S. dollar after the figures were published.

"June's increase in retail sales volumes suggests that consumers kept on spending despite the rise in energy prices since the war in Iran began," said Ruth Gregory, deputy chief UK economist at Capital Economics.

"But with the drag on households' real incomes set to intensify, we don't expect this resilience to last."

SHOPPERS FACE 'BIGGER TEST'

Quarterly sales volumes rose by 0.6% in the three months to June, while volumes were 4.2% higher compared to a year ago, against economists' expectations of a 2.3% rise.

But Thomas Pugh, chief economist at RSM UK, said the "bigger test for consumers" is yet to come as energy prices surged again on the re-escalation of tensions in the Middle East conflict.

"Inflation is likely to rise above 3.5%, increasing the risk that the Bank of England raises interest rates. That would squeeze household budgets and could start to weigh on consumer spending," Pugh said.

The BoE is expected to keep interest rates on hold at 3.75% next week as it continues to assess the impact of the war. But investors were pricing in around two quarter-point hikes in borrowing costs by the end of the year.

Other recent updates from major British retailers have painted a more mixed picture of consumer demand.

Supermarket group Sainsbury's said trading in its third quarter had improved, helped by the heatwave, while electricals retailer Currys reported "very solid" trading, with the soccer World Cup spurring demand for televisions and the hot weather causing a spike in demand for fans and air conditioning products.

However, Sports Direct owner Frasers warned it was still feeling the impact of tough trading conditions, subdued consumer confidence and industry-wide excess inventory levels.

(Reporting by Suban Abdulla; Additional reporting by James Davey; Graphic by Pasit Kongkunakornku; Editing by William James and Helen Popper)