By William Schomberg

LONDON (Reuters) – British retail sales fell by much more than expected in October, according to official data that added to other signs of a loss of momentum in the economy in the run-up to the first budget of Prime Minister Keir Starmer’s new government.

Sales volumes dropped by 0.7% from September, compared with a median forecast for a 0.3% fall in a Reuters poll of economists.

The drop was the sharpest since June, when sales fell by 1.0% from May. A monthly rise in sales in September was revised down to 0.1% from a previous estimate of a 0.3% gain.

Sterling fell by about a fifth of a cent against the U.S. dollar immediately after the data before recovering.

The Office for National Statistics said retailers across the board reported that shoppers held back on spending ahead of the new government’s first tax and spending budget on Oct. 30.

Momentum in the economy weakened in the months ahead of the budget with gross domestic product edging up by only 0.1% in the July-to-September period, according to official data published last week.

Finance minister Rachel Reeves spared individuals from her heaviest tax increases, which fell instead on employers, and there were some signs that Britons have overcome at least some of their nervousness since the budget.

A consumer confidence index, published by opinion polling firm GfK, rose in November and its measure of consumers’ willingness to buy expensive items improved.

Jacqui Baker, head of retail at accountancy firm RSM UK, said retail sales were expected to pick up with Black Friday deals in November and Christmas shopping in December.

The budget didn’t deal a huge blow to consumers in the form of tax rises, plus interest rates continue to come down, and the American election is now out of the way, which should help with confidence and create a clear runway for Christmas spending,” Baker said.

SCHOOL HOLIDAYS FACTOR

The ONS said another possible drag on retail sales last month came from the school half-term holidays for England and Wales, which typically fall within the October data reporting period but did not this year.

Sales of clothing were particularly weak in October – down by 3.1% after a 0.3% rise in September.

The British Retail Consortium, representing the industry, has previously linked the fall to mild weather.

The ONS said during the 12 months to October, sales volumes rose by 2.4%, slowing from September’s 3.2% rise and weaker than the median forecast in the Reuters poll for a 3.4% increase.

Sales rose by 0.8% over the three months to October, the weakest such rise since June and were 1.5% lower than immediately before the coronavirus pandemic, reflecting in part the loss of spending power incurred by the jump in inflation caused by COVID and Russia’s invasion of Ukraine.

After falling sharply in recent months, inflation rose by more than expected in the 12 months to October.

Recent reports from big British retailers have been upbeat about the Christmas season.

Department store John Lewis said it was “quietly optimistic”, budget fashion retailer Primark said it expected good trading, while clothing and food retailer Marks & Spencer and supermarket Sainsbury’s forecast strong festive performances.

However, home improvement retailer Homebase fell into administration.

(Additional reporting by James Davey; Writing by William Schomberg; editing by Sarah Young, Kate Holton and Alex Richardson)