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British shoppers cut back on their spending last month as the effects of rising unemployment and slow income growth took its toll.
The Office for National Statistics said retail sales dropped 0.4% between August and September, leaving sales up 1.8% on a year earlier, the lowest increase since February 2006.
Although the monthly fall was smaller than had been expected by City economists, they warned that worse is still to come.
"Retail sales data will have significantly further to fall," said James Knightley, economist at ING Financial Markets. "Indeed, with unemployment rising, asset values plunging and wages failing to keep pace with the cost of living, the squeeze on household budgets is likely to prompt a major contraction in consumption," he said.
Today's data showed that the largest contributions to the sales decline came from textile, clothing and footwear stores, where sales fell by 2.3% on the month, and household goods stores, where sales fell by 2%.
The ONS also said that sales in the third quarter of the year rose just 0.1% from the second quarter. That is down from 0.5% growth in the April to June period.
The weak numbers bring the official data into line with recent surveys by the British Retail Consortium and the Confederation of British Industry, which have shown consumers have reined in spending as soaring living costs and worries about the credit crunch have dented confidence. The official retail sales figures have been surprisingly strong in the last couple of months but have now turned around.
Separately, a report from Verdict Research suggested spending on non-food items on the high street is set to fall in the run up to Christmas for the first time in more than a decade. Verdict predicts that overall retail spending is expected to rise just 2%, in the second lowest growth rate in 20 years.
And the growth will be driven by spending in supermarkets while spending on non-food items is set to fall 0.2%. "This is going to be the toughest retailer environment ever," said Verdict analyst Maureen Hinton.
ING's Knightley said he thought the weak spending would contribute to a recession which has already begun, and would strengthen the case for the Bank of England to lower interest rates.
"We believe that this will contribute to four consecutive quarters of negative GDP growth and scope for significant further cuts in interest rates – we see the policy rate at 2.75% in the second quarter of 2009."
The British Bankers' Association announced today that new mortgage approvals ticked up slightly to 23,400 from August's record low of 21,300.
The BBA statistics director, David Dooks, said: "It was not surprising to see continued low levels of mortgage lending and approvals in September, ahead of the government's banking support announcements. Compared to a year ago, the mortgage environment has changed significantly, with supply restricted as a consequence of the situation in financial markets and demand at a much-reduced level."
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