U.K. Retail Sales Dropped in May for First Time in Three Months

June 18 (Bloomberg) -- U.K. retail sales unexpectedly dropped in May for the first time in three months as rising unemployment dissuaded shoppers from buying clothes and shoes.

Sales fell 0.6 percent from April, the Office for National Statistics said today in London. Economists predicted a 0.3 percent increase, the median of 28 forecasts in a Bloomberg News survey shows. Sales dropped 1.6 percent from a year earlier.

Bank of England Governor Mervyn King said yesterday that Britain's path to full recovery may be ``protracted'' as banks keep rationing loans to consumers. J Sainsbury Plc, the U.K.'s third-biggest supermarket owner, predicted this week that the economic environment will stay ``challenging'' for the rest of the year.

``Unemployment will keep rising,'' said Amit Kara, an economist at UBS AG in London, and a former central bank official. ``The economy will shrink in the second quarter. But it's looking better than it was a few months ago.''

On the year, the value of sales dropped 1.1 percent, the most since records began in 1988. The annual data are affected by ``unusually large'' estimates of retail sales a year earlier in May 2008, officials said.

Clothing, textiles and footwear retailers and department stores led the monthly sales decline in May, the statistics office said. Sales at non-food stores dropped 1.4 percent, outweighing a 0.3 percent increase at food stores.

M&S Profit

Marks & Spencer Group Plc, the Britain's largest clothing retailer, announced a 38 percent slump in annual profit on May 19. Home Retail Group Plc, the owner of Argos stores in the U.K., on June 11 cut its profitability forecast for Homebase and said sales at the home-improvement chain fell in May.

Chancellor of the Exchequer Alistair Darling said yesterday that he's ``confident there will be a sustained recovery.'' Britain's recession has harmed the prospects of Prime Minister Gordon Brown, who this month fought off a crisis in his government after the ruling Labour party had its worst-ever result in local elections.

Unemployment rose to the highest level since 1996 in the three months through April, the statistics office said yesterday. The Confederation of British Industry predicts the unemployment rate may rise to 9.6 percent next year, when Brown must call an election, from the current 7.2 percent.

The central bank this month continued a program to buy 125 billion pounds ($205 billion) of bonds with newly created money to stimulate the economy and kept the benchmark interest rate at 0.5 percent, a three-century low. King said yesterday that it is too early to withdraw the ``extraordinary'' stimulus in the British economy.

``The risk of a continued sharp contraction in output in the near term had receded somewhat,'' minutes of the bank's June 4 decision said yesterday. ``However, there was no reason to conclude that the medium-term outlook for the economy, and thus inflation, had changed materially.''

The retail price deflator, a measure of cost changes in shops, showed a 0.7 percent increase on the year, today's data showed. Inflation was 2.2 percent in May, faster than economists had forecast and above the central bank's 2 percent target.

By Brian Swint