Record 3.9% decline in high street spending fuels recession worries

The biggest monthly fall in consumer spending today heightened fears of a high-street meltdown.

Sales plunged 3.9 per cent last month, far more than most City analysts had been forecasting, suggesting that the credit crunch is tightening its grip on household finances.

The fall was the biggest recorded by the Office for National Statistics since it began measuring retail sales on a monthly basis in 1986 and increased worries about the British economy tipping into recession.

It also raised expectations in the City that the next cut in interest rates might come sooner than the end of the year with the Bank of England forced to act to stop the economy going into freefall. The pound dropped nearly 1.5 cents against the dollar after the figures were released.

The growing sense of crisis on the high street was increased by grim trading figures from trainers and replica football kit chain JJB Sports, which reported a two per cent fall in sales at its 425 stores.

Chairman Roger Lane-Smith said: "The management remain cautious about the outlook for the remainder of 2008 in view of the difficult retail environment." He added that the second half of the year would be "very challenging".

The figures come days after the collapse into administration of the General Trading Company near Sloane Square, the 88-year-old store where Princess Diana and Camilla Parker Bowles lodged their wedding lists.

Last month's fall in spending reversed an unexpectedly buoyant figure for May, which many analysts dismissed as a blip. The annual rate of growth of retail sales is now down to 2.2 per cent compared with 7.9 per cent in May.

David Buik of City bookmakers BGC Partners said: "We always knew that retail sales for June were going to be ghastly, and so they were."

A succession of retailers have reported weak or disastrous trading figures in recent weeks, pointing towards another drop in consumer spending when this month's figures are released. Marks & Spencer said at the start of this month that sales had dropped five per cent, the most since 2005.

Even supermarkets and other food stores - generally thought quite safe in a downturn - did not escape the "shoppers' strike" with sales down a record 3.6 per cent. However, yearon-year they are up a healthy 6.5 per cent. For non-food stores the monthly drop was 4.5 per cent. Only the West End appears to be bucking the trend.

Tourists boosted sales by 8.7 per cent on the year.

The City will be poring over a trading statement from Next and results from the Carphone Warehouse due next week for more signs of deterioration.

The slide in spending means retailers have very little scope for passing on cost increases to consumers which will bite into their profit margins.

Economists said they expected the slide in sales to continue as rising mortgage payments, utility and food bills and rising unemployment all take their toll on disposable income.

Howard Archer, chief European and UK economist at forecasters Global Insight, said: "The prospects for consumer spending over the coming months continue to look pretty bleak.

"Major concerns over the economy, higher debt levels and increasingly rising unemployment are all dampening factors for consumer spending."