Jeremy Warner's Outlook: Despite the grumbling, there's no recession in retailing yet, but there are plenty of losers

Higher utility bills, rising taxes, progressively squeezed disposable incomes - it should all add up to lower consumption. Yet there was little sign of it in yesterday's clutch of economic data, which gives scant support to those retailers complaining of one of the toughest Christmases on record.

According to a survey by the CBI, retail sales over the four weeks to 13 December soared to their highest level in two years. Anecdotal evidence from CBI members since then suggests that the trend has extended into the final pre-Christmas rush. If disposable incomes are being squeezed, and people are paying down their plastic, where's the money coming from?

One explanation may lie in record mortgage lending. A big chunk of this is likely to be equity withdrawal in some shape or form. Consumers are possibly being more responsible with their credit cards, but through mortgage finance they may still be increasing their debt. It is the debt- fuelled nature of the British and American growth stories which is giving so much cause for concern. Oblivious to rising interest rates, people are still taking on more of the stuff.

Yet the consumption it feeds is far from being doled out in equal measure. The big picture on the high street this Christmas is of clear winners and losers. Some are doing extraordinarily well - step forward Marks & Spencer and John Lewis - and have been able largely to avoid price discounting, while others have been doing quite badly.

One example of the latter category is HMV, the books and music retailer. There was something inevitable about yesterday's profit warning. After Woolworth, which has already cautioned on poor CD and DVD sales, it was so widely expected that it cannot really be said to amount to a profit warning at all. Simon Fox, the new chief executive, blames his ill-fortune in part on an uninspiring Christmas music chart, which is topped by Take That (who they?) and Cliff Richard (who he?). Hardly the stuff to make you run to the shops in anticipation.

But his problems plainly run deeper than a couple of duff hits. Many analysts call Mr Fox's position the toughest job in British retailing, and it is hard to disagree. Caught between the supermarkets on the one hand, and the download phenomenon on the other, Mr Fox is going to have to completely reinvent his business model over the next few years. If he stays as he is, he'll be dogmeat. He needs to transmogrify into something else. The Waterstone's bookstores would seem to stand a better chance than the music outlets, but even here, the competition from e-tailing is growing all the time.

Other retailers who have failed to invest or think about the profound structural changes being forced upon their industry by e-commerce will be similarly challenged. None of this has dampened ambition and optimism in this still-extraordinarily entrepreneurial sector. Most chains have plans to add acres of new selling space over the next few years.

Whether the market is big enough to absorb all these plans seems open to question. Yesterday's data sets the scene for another rise in interest rates shortly into the new year. We may be spending now, but what happens then?

British Energy disappoints again

It's one mishap after another at British Energy. Being bailed out by the state four years ago should have been a galvanising experience, but to judge by a string of profit and revenue warnings over the past year, the nuclear power generator's operational problems remain as acute as ever.

The bull case for British Energy has long been in the idea that efficiency in the group's eight nuclear power stations could eventually be improved to something close to the best practice achieved in the US and France. This may always have been impossible in a company which has suffered years of under investment and whose gas-cooled reactors are now an obsolete technology.

Yet the theory was reasonable enough. Nuclear power plants have high operational gearing; their running costs are big whether they are generating electricity or not. The less time spent in outages, the more money they make. Despite its best efforts, management has failed to deliver on its promises of enhanced productivity.

The news yesterday was that repair work for cracked pipes at two of the company's AGRs will now take until next March to complete. Previously, British Energy had hoped to have the plants fully operational again by this month. Once more the company has proved overly optimistic. It's become a familiar pattern, leading many investors and analysts to despair of the company's ability ever to meet its targets, let alone surprise on the upside.

The Government had hoped by now to have offloaded the 65 per cent stake it acquired in British Energy in return for taking £5bn of decommissioning costs off the company's hands.

At the time the sell-off plan was hatched, the amount the Government could have raised would have virtually matched these liabilities, obviating the need for any further calls on the taxpayer. Not any more. The Government missed its chance. Persistent outages make it hard to sell the holding at all, let alone get a worthwhile price for it. They also provide a deeply negative backdrop to government hopes of persuading the private sector to finance a new generation of nuclear power plants.

I've long thought the best solution to British Energy's problems would be to sell the company outright to Electricité de France which, given the chance, would be keen to buy. EdF also has the expertise and financial muscle necessary to embark on a programme of new nuclear building without recourse to government subsidy.

Yet though everything else in Britain appears to be for sale, ministers would likely draw the line at British Energy. Think of the headlines in the Daily Mail if Britain's nuclear future, albeit only the civil one, were surrendered to the French. For the time being, British Energy must hobble along as best it can, outages and all.

No end in sight to merger boom

Merger booms frequently come to be seen as the last drunken dance of the bull market. The present one is without doubt a humdinger of a deal fest, surpassing by some distance the previous record set during the madness of the dotcom bubble. Prophets of doom draw the obvious conclusion - it's all about to end very badly indeed.

Anyone who tells you the business cycle is dead needs to go take a cold shower. As sure as night follows day, there will eventually be a business downturn. Yet no-one can say exactly when, and there is good reason to believe the present merger mania has a way to go yet before it falls flat on its face.

Confidence among chief executives remains high, and hardly anyone expects a recession any time soon, even in the US, where a slowdown is already underway. This in itself is supportive of deal making, as companies seek to consolidate to keep earnings growing and face up to the challenge of globalisation. There is also a structural change occurring in the M&A market which may make it more immune to the economic cycle than it has been in the past.

Two entirely new participants have entered the scene - private equity and the developing world. Even a few years back, nobody would have thought the participation of players from India, China, Brazil and Dubai, all with big cheque books, remotely likely. As long as credit conditions remain benign, there's also little to stop the ever-onwards and upwards march of private equity. The targets grow bigger and more varied by the day as the financial buyers seek to use the power of leverage to increase capital efficiency.

As the good times roll, investors and bankers become increasingly oblivious to risk. Normal standards of assessment and probity are abandoned in the search for yield. There's plenty of evidence of that in today's merger boom. Yet there is nothing self-evidently which is about to bring it to an end. My prediction is that it is going to get madder still before it reaches its inevitable conclusion. The best, or worst, depending on your point of view, is yet to come.

j.warner@independent.co.uk