Jeremy Warner's Outlook: Tough times beckon on the high street

Government culpable in debt overhang; Gaffe that states the 'bleedin' obvious

If Simon Wolfson's remarks about needing to get the magic back into the Next brand and take more risks with the product range sound familiar, that's because they are. The Next chief executive said exactly the same thing at the time of his previous results statement six months ago. Evidence of progress since then is at best patchy. True, he's managed to slow the rate of decline in like-for-like sales in the core retail franchise, but at 3.6 per cent, the headline shrinkage still makes for grim reading.

The over-riding story at group level of still-rising revenues and profits is accounted for largely by continued success with the directories business, yet even here Mr Wolfson thinks progress will slow markedly in the second half of the year, when growing competition online and tighter credit conditions are expected to reduce revenue growth to zero.

The message is that Britain's clothing retailers are struggling. To underline this story yesterday there was separately a profits alert from JJB Sports and a warning from French Connection that group sales in the second half are expected to drop.

Something more than the dreadful summer weather is plainly at work here and it is not hard to identify what. Discretionary spending is being squeezed as higher interest rates eat deeper into disposable income. With British consumers surely at the upper limits of their capacity to borrow more to spend, something has got to give. It tends to be the new suit, coat, pair of shoes or party frock that gets the bullet first.

If there is no underlying growth in the market, the only game in town becomes stealing market share from each other. This is precisely what the leading retail players are engaged in. Both Next and Marks & Spencer are refurbishing and expanding their space like topsy. For the market as a whole, it must be a zero-sum game which only creates further overcapacity on the high street. The gamble for both M & S and Next is that, even in a shrinking market, consumers will gravitate towards their aspirational, value-for-money, proposition.

Yet the game is perhaps easier for M & S than it is for Next, which despite efforts to expand in homewares remains essentially a pure clothing retailer. M & S by contrast still has the hedge of fast-growing food convenience stores, and a now aggressive push into general merchandise, the latter of which makes for a more effective use of selling space in refurbished stores.

Still, even for M & S, conditions look set to become decidedly choppy. Few retailers are prepared to call the three-month run-up to Christmas. The consumer economy looks too uncertain. Yet the penalties for getting the run rate wrong and either over or underordering stock are bound to be severe in terms of lost margin or sales. Rarely has the retail environment looked more challenging. The next M & S update is on 6 November, the day after bonfire night. By then, retailers ought to be in a better position to know whether Christmas is going up in smoke.

Government culpable in debt overhang

In the search for culprits to explain the present chaos in credit markets, investment bankers, credit rating agencies, hedge funds, regulators and central banks have all had it in the neck. But what about the Government, whose reckless encouragement of the dash for debt seems so far to have gone uncommented on?

There are a number of ways in which public policy can be said to have been responsible for the 10-year credit boom that lies at the heart of the present crisis.

First and foremost, it has been in the structure of monetary policy itself, where in setting interest rates the Bank of England has been forced to focus on a quite-narrow measure of inflation which fails to take account of the biggest inflationary factor in the UK economy of the lot – the cost of housing.

This has allowed interest rates to be lower than they should have been, underpinning the boom in both credit and house prices. Exactly the same observations can be made about the US, where monetary policy has again focused on a quite misleading measure of inflation which fails to take account of the asset price bubble of housing.

Now interest rates have risen to more realistic levels, many householders find they cannot afford the debt that was rammed down their throats in the years of plenty. You can blame all this on the snakeoil salesmen of the credit card and mortgage companies, but the underlying cause was public policy, deliberately pursued to sustain the consumer economy and give the illusion of prosperity.

Changes in the tax system have further encouraged the "de-equitisation" of the UK economy and its replacement with debt. Gordon Brown's abolition of the tax credit on dividends removed any lingering competitive advantage that equity had over debt as a form of capital and thereby encouraged the process of leverage that now threatens long-term investment and thereby large parts of the UK economy.

The cost of debt is allowable against taxation, the cost of equity is not. This cannot be right, yet it has been pursued as a deliberate act of public policy, never mind the further advantages enjoyed by leveraged buyout practitioners when it comes to personal taxation of income and capital gains.

There are other manifestations of the distorting effects of the tax system too. Share trading attracts stamp duty, credit trading does not. One notable exception to the slowing housing market is the buy-to-let phenomenon, which is still booming. And why wouldn't it when borrowing to buy for the purpose of rental accommodation can be used as a highly effective way of avoiding both income and inheritance tax?

I could go on, but it is perhaps time to switch tack from analysis of the causes of the crisis to why nobody seems to be doing anything about its treatment. Here too Government policy may have something to answer for. The separation of banking supervision from monetary policy has both diminished the Bank of England's authority in the City and created confusion around the role the authorities are expected to play. Both the Bank and the Financial Services Authority have seemed like rabbits caught in the headlights of an oncoming car.

Blame the investment bankers all you like, but don't forget that markets will always adapt to the terrain as they find it. Public policy in both the US and Britain has been a key driver in the build-up of securitised debt. Not only have the authorities done nothing about it. To the contrary, they have actively encouraged it.

Gaffe that states the 'bleedin' obvious

Given that Bob Diamond, head of the investment banking side of Barclays Bank, has virtually conceded defeat in the battle for control of ABN Amro, is there really any point in Barclays proceeding with Friday's shareholder meeting to approve the deal?

Mr Diamond's remarks produced gasps of surprise when he made them at a Lehman Brothers conference this week, if only because he's not actually the boss of Barclays, and, even if he were, bidders are not meant to say that sort of thing. Who's actually running Barclays these days? Is John Varley, the chief executive, still in the saddle. And what's happened to Marcus Agius, the chairman? Whatever the answer, the only person speaking up for the bank on the credit crunch and ABN is Mr Diamond.

Still, though he may have been speaking out of turn, he shouldn't perhaps be faulted for stating the bleedin' obvious. Since when was acknowledging reality a sin? As things stand, the rival offer from a Royal Bank of Scotland-led consortium beats Barclays by a country mile and there is no chance of Barclays narrowing the difference.

All the same, it wouldn't make any sense to abandon the meeting. By sticking around to the bitter end, Barclays at least defrays its costs by being in a position to claim the €200m break-fee. And in any case, it is never over until it is over. There's still an outside possibility the consortium offer will implode. With the banking crisis biting hard, Santander for one seems to be resorting to some pretty desperate measures to raise its share of the financing.

j.warner@independent.co.uk