David Prosser: Retailers face an unhappy new year

Outlook What is going on up and down the high streets of Britain? There are plenty of reasons to think that retailers are enjoying a much happier time in the run-up to Christmas than they would have dared to hope for even three months ago. The latest CBI distributive trades survey shows retailers maintained positive momentum during the first half of this month, while some of the short-term figures posted by stores such as John Lewis look spectacular, even allowing for weak 2009 comparables. London, in particular, seems to be performing well, with West End stores reporting buoyant trading.

Yet the doubts persist. The official data from the Office for National Statistics yesterday suggested retail sales were down in November. There may be some statistical oddities to blame – modest food-price inflation and unusually mild weather for the month – but there are other worrying straws in the wind too. Footfall figures from Experian show there have been fewer shoppers out and about over the past week compared with this time last year. And the collapse of Threshers and Borders over the past couple of months tells you that not everyone is benefiting from sustained retail spending.

One problem may be that cost- conscious Christmas shoppers are playing the traditional wait-for-the-sale game even more aggressively this year, which may be one explanation for those Experian figures. If people are doing their shopping closer to Christmas this year, in the hope that retailers will lose their nerve and cut prices, that would lead to lower footfall during the earlier part of December (though if the shops are forced into pre-Christmas sales to get people through the door, that will hit margins and profits).

Moreover, there will be some retailers who benefit this year by taking a larger slice of an even smaller cake. The exit of Woolworths and Zavvi has boosted sales at shops competing in these spaces. You have already seen several music and toy retailers reporting they have made gains thanks to the misfortune of their former rivals.

Even so, time is running out for retailers to boost their coffers. While the retail sector's prospects in the run-up to Christmas are difficult to call, the same cannot be said of the new year. The restoration of VAT to the full 17.5 per cent rate on 1 January is only one of several reasons why the shops should be nervous about 2010 as a whole (and even beyond).

With tax rises to come in April, further unemployment possible and wage restraint certain to continue in both the public and the private sector, it's difficult to imagine too many consumers going on a spending spree. Even among those whose jobs are not threatened, disposable income is likely to fall next year, especially with increases in council tax and energy bills to come.

There are some bright spots. London should continue to perform relatively well. The weak value of sterling has boosted tourist numbers, swelling the ranks of shoppers in the capital. That positive trend at least is not likely to be reversed while doubts about the economy persist.

It's also fair to say that the weakest parts of the retail trade have already been forced to shut up shop. Most of those retailers that have made it through the worst of the downturn should be resilient enough to survive flat sales, though declines would be tougher to cope with.

Another plus point is that an increase in interest rates from the current 0.5 per cent historic low looks unlikely during the first half of next year and may even be delayed until 2011. Mortgage borrowers have little to fear from that threat to their personal finances at least. We know, too, that unemployment now seems unlikely to reach the levels many economists feared.

However, retailers need a bumper Christmas to build up some fat stores for the leaner times ahead. Judging from the latest data, not everyone is fattening up as quickly as they might like. Will that leave them short of the insulation they need to survive the cold blast heading their way?