Photo used for illustrative purpose.

British retailers suffered the biggest drop in sales for almost three years during December, raising the risk that the economy slipped into recession late last year, official data showed on Friday.

The Office for National Statistics (ONS) said people doing Christmas shopping earlier than usual - especially for food - contributed to retail sales volumes shrinking 3.2 per cent between December and November.

It was the biggest monthly drop since January 2021 and left the level of sales at its lowest ebb since May 2020.

The reading was worse than all forecasts in a Reuters poll of economists which had pointed to a 0.5 per cent fall.

Compared with a year earlier, retail sales excluding fuel were 2.1 per cent lower in volume terms and up 2.3% in cash terms, the smallest annual increase since December 2022.

While chiming with other downbeat retail surveys from the Confederation of British Industry and British Retail Consortium, Friday’s data looked at odds with some positive Christmas trading reports from Britain’s largest supermarkets.

The pound weakened slightly against the US dollar and euro and British government bond prices rose in response to the data. British stocks rose on hopes the data could prompt earlier interest rate cuts from the Bank of England.

Retail sales are likely to subtract 0.04 percentage points from British economic output in the fourth quarter, the ONS said, which could be the difference between a negative reading and a flat reading for the economy.

The economy contracted 0.1 per cent in the third quarter.

While many economists regard the definition of recession as two quarters of contraction as arbitrary, it would have major political implications for Prime Minister Rishi Sunak in what is due to be an election year.

With his Conservative Party lagging far behind the opposition Labour Party in opinion polls, Sunak’s pitch to voters is based on the idea that Britain is moving in the right direction - which a recession diagnosis would undermine.

Finance minister Jeremy Hunt, speaking in Davos on Thursday, said he wanted to move in the direction of cutting taxes ahead of a crucial annual budget that Conservatives hope will revive their fortunes.

The economic backdrop remains doubtful, however.

“Food stores performed very poorly, with their steepest fall since May 2021 as early Christmas shopping led to slow December sales,” Heather Bovill, deputy director for surveys and economic indicators at the ONS said.

The ONS said there was anecdotal evidence that consumers had stocked up on Christmas food and gifts in November, when sales grew 1.4 per cent on the month.

The data clashed with strong Christmas food trade reports from Tesco and Sainsbury’s, Britain’s biggest supermarkets. Other retailers, including sportswear firm JD Sports and luxury fashion brand Burberry, warned on profit.

“The contrast between these figures and the better reported sales announced by several large retailers this month is stark, albeit those numbers will have represented pounds in the till including the impact of inflation, and over a longer time period - including November in most cases,” Lisa Hooker, leader of industry for consumer markets at PwC, said.

Even with these adjustments, the picture is weak.

Retail sales excluding fuel in the final quarter of 2023 were down 1.4 per cent in volume compared with a year earlier and up 3.9 per cent in cash terms - the weakest growth in spending since the three months to February.

“The drags from the cost-of-living crisis and sharp rise in interest rates are still weighing on real incomes and consumer spending,” Alex Kerr, economist at consultancy Capital Economics, said.

Meanwhile London’s blue-chip share index rose on Friday as the sterling came under pressure from much weaker-than-expected retail sales data that further swayed expectations around when the Bank of England would start cutting interest rates.

The FTSE 100 climbed 0.7 per cent by 0809 GMT, extending its recovery for a second day but still on course for a weekly loss.

Data showed British retailers suffered the biggest drop in sales in almost three years during December, raising the risk that the economy entered a recession in the fourth quarter.

The sterling dipped 0.2 per cent after the data, in turn helping dollar earners such as Shell and AstraZeneca, which draw a large part of their revenue overseas.

The domestically-focussed FTSE 250 index added 0.5 per cent but was also headed for a weekly loss. Among individual stocks, homebuilder Persimmon climbed 2.7 per cent after Morgan Stanley upgraded the stock to “overweight” from “underweight”.

Deliveroo inched up 0.9 per cent after the meal delivery company said its 2023 earnings would be “slightly” ahead of the 60-80 million pounds ($76-101 million) it had forecast.