David Prosser: Next time, be afraid of the big bad wolf

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The Independent Online

Outlook Next is earning itself something of a reputation for making overly conservative trading forecasts, having upgraded its expectations on three separate occasions this year. So it is tempting to dismiss Simon Wolfson, the retailer's chief executive, as the boy who cried wolf (pardon the pun) following yesterday's warning that the outlook for 2010 looks more worrying, notwithstanding Next's better-than-expected recent performance.

After all, many of the dire predictions made earlier this year about the UK High Street – in particular that a series of well-known names would follow Woolworths into the history books – have not come true. Indeed, Next is far from alone in reporting improving figures of late. This month alone, Debenhams, Kesa, Sports Direct and DSG have all offered upbeat reports.

Their more positive tone is in tune with official retail sales figures, which have confounded expectations all year, albeit with some ebb and flow. And while there has been some scepticism about the integrity of the Office for National Statistics' data, it has been broadly in line with reports from the CBI.

There's a good reason that the expected bloodbath has not come to pass. While the UK has been mired in recession ever since the New Year sales, many people are actually much better off than they were, thanks to the unprecedented low level of interest rates. Those who have not lost their jobs may have been more cautious as anxieties about the economic environment have increased – paying down debt rather than spending – but they have also had more disposable income.

Other factors, notably retailers' efforts to drive down costs and manage supply chains more carefully, have also helped, as have price cuts and – to a limited extent – the VAT concession, but shoppers have nonetheless continued to spend much more extravagantly than the High Street had anticipated. Certain parts of retail – think DIY and home furnishings, say – have been hammered by the housing market downturn, but the likes of Next have not done so badly after all.

All the same, it may be that this time, Mr Wolfson is right to fear a nasty beastie lurking round the corner. If 2009 has been the year of the recession, 2010 is likely to be the year in which the bill arrives. Public sector workers, who have been immune so far to unemployment, are likely to find themselves on the wrong end of those dreaded cuts the Prime Minister has suddenly discovered. All of us, meanwhile, face the prospect of tax rises – and not just an end to cut-price VAT.

Disposable income, in other words, is about to take a hit – and not just for those people unfortunate enough to lose their jobs. We already know about the higher income tax bills that are set to take effect in April, but there will be other hikes too. Even another bout of the decent weather that helped Next in the spring season just gone may not be enough to prove Mr Wolfson wrong this time around.

Interestingly, the change of government that Next's chief executive so ardently desires is not likely to give much of a boost to the retail sector either. Though he refused to be drawn on suggestions yesterday that a Conservative administration might have a slot in mind for him, Mr Wolfson would be an attractive hire for David Cameron, assuming he has not been put off by Gordon Brown's "government of all the talents" experience. If so, his friends in the retail sector shouldn't expect any favours.

Indeed, Mr Wolfson may find himself part of a government that raises VAT to 20 per cent as it attempts to get on top of the public finances. The Conservatives have already refused to rule out such a move. Nor is the retail sector's campaign for an abandonment of the plan to raise business rates next April likely to have any more traction with a Tory government seeking increased taxation revenues. The £1bn on offer from the increases is too good a windfall to forego.

The irony is, in fact, that having spent much of this year making unduly pessimistic predictions, Mr Wolfson spends a good portion of the next 12 months serving a government that feels compelled to behave in a way that finally turns those worst fears into reality. Suddenly, a career in politics looks less attractive, even if the alternative option is to stick with gloomy old retail.

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