Jeremy Warner's Outlook: Even Next struggles with high street blues

US rate rise; Business leaders
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The Independent Online

The Financial Services Authority's insistence just before Christmas that retailers with bad news to announce get it out into the open at the earliest possible opportunity has prompted a sense of dread among stock market followers of the retail sector. So far two leading retailers - Woolworths and House of Fraser - have brought their Christmas trading statements forward to comply with the FSA's directive. Who's going to be next?

As it happens, Next was due to announce its trading update yesterday in any case, but investors couldn't have drawn much comfort from what it had to say. Like for like sales growth in the period between August 3 and December 24 was a barely detectable 0.5 per cent. Simon Wolfson, the chief executive, admits to mistakes, particularly in menswear, where the company failed to spot some important fashion trends early enough. The company also failed to clear its stock in its end of season sale.

Even so, fashion retailers don't come any more high calibre than Next and it's a reasonable assumption that the company would have been one of the better performers this Christmas. If this is as good as it gets among the major chains, then performance of others is going to look grim indeed. Worryingly, Mr Wolfson is also exceptionally cautious about the outlook for the coming year. He's planning for only very modest growth in consumer spending.

Investors shouldn't read too much at this stage into the absence of a trading update from Marks & Spencer. M & S isn't scheduled to report until next Wednesday but the fact that it hasn't yet announced anything isn't necessarily good news. It may still be adding up the numbers.

The market has in any case already been primed to expect a quite considerable fall in M & S's like for like sales. For M & S to announce early, the news would have to be truly dire, and that's not the general buzz. Indeed, M & S seems to have stolen a bit of a march on its competitors by having its two, twenty per cent off promotional days relatively early in the season. Others seem to have left their promotions far too late to make a difference.

Wisely, Stuart Rose, the M & S chief executive, has given himself lots of room for disappointment before he's committed to delivering. Last year was all about clearing out the legacy of his predecessors, he's said, and even this year he's promising to do no more than "stabilise" sales. Sustainable like for like sales growth on his timetable isn't expected to start showing through until the beginning of next year.

Still, Mr Rose and his team have to justify turning down Philip Green's £4 a share at some stage, and there's no doubt that the present environment is making it a whole lot tougher. As the housing market cools, consumers seem to be putting the profligacy of recent years behind them. Instead, households are concentrating more on paying down debt and rebuilding savings.

The Victorians always thought of thrift as a good thing. It took John Maynard Keynes to point out that economically it can be quite harmful - a characteristic he called "the paradox of thrift". The more people save, the less they have to spend, which depresses demand and damages economic growth. In extreme circumstances, it can push the economy into recession. As demand falls, unemployment rises, which further depresses demand and so on and so forth.

But don't worry, this is not an economics lesson, nor does it appear at all likely that this vicious downward cycle of demand will set in this time around.

What we can expect is a much more cautious retail environment. Bad retailers will struggle to stay afloat, and even the good ones will have to be doing something very special to show decent levels of growth. After all the excitement of recent years, retailing is heading for a dull patch. It may well be that Philip Green had a lucky escape when he failed in his bid for M & S last summer. There are too many uncertainties and negatives out there for him to want to have another go any time soon.

Only one major retailer - Tesco - seems to be bucking the trend, and in so doing it is exaggerating it for others by stealing their markets. As consumption slows, Tesco's buying power becomes ever more awesome, piling on the agony for its competitors, who now stretch far beyond the confines of the other big supermarket groups.

US rate rise

Much bellyaching at the last meeting of the Federal Reserve's Open Markets Committee (FOMC) on whether the FOMC statement should again indicate that policy accommodation could be removed at a pace that was likely to be "measured". Some members thought it would improve the Fed's flexibility in setting interest rates if this forward looking element to the statement were removed.

We know this because the FOMC has decided to start publishing the minutes to its meetings on an expedited basis just three weeks after the meeting takes place. Perhaps it should think again, for the effect on the markets, only partially reversed yesterday, was dramatic. The Dow plunged and the dollar strengthened. There were other elements to the statement too which indicated that perhaps US interest rates are going to increase on a rather steeper trajectory than previously assumed. Some members of the Committee expressed concern about the effects of the weak dollar on inflation, while others noted that the impressive productivity gains the US economy has shown in recent years seem to be running out of steam. That may mean the US economy is closer to fully capacity than thought, which in turn may mean inflation isn't as tame either.

In the end the Committee decided to leave the policy statement as it was, but the episode has certainly undermined the validity of such pronouncements. The FOMC's statements lack the subtlety of debate which is apparent in the minutes, and as such may not be terribly helpful. Perhaps the Fed should adopt the Bank of England's approach, which is to say as little as possible outside the minutes, the Inflation Report and the speeches of Monetary Policy Committee members.

In any case, the cat is now out of the bag. The era of exceptionally loose American monetary policy is drawing to a close at a much more rapid pace than the markets thought likely. Where the neutral level is for US rates these days is anyone's guess, but it is certainly a lot higher than it is now. Nor is it likely to be as low as believers in the American productivity miracle have been suggesting. America needs higher interest rates, both to support the dollar and the budget deficit. Both in the US and Britain, interest rates have been used highly effectively to stave off the worst consequences of the business downturn, but it is only possible to support the dyke for so long. Policy makers may find that inflation forces their hands sooner than they would like.

Business leaders

According to a survey by Mori, 95 per cent of our captains of industry were prefects while they were at school. This scarcely counts as the most surprising sociological finding of the early twenty first century, but it does help to explain why the performance of British industry is so poor.

In my experience, boys were made prefects not because they were born leaders but because they were clubable, responsible types who got on well with the teachers. There were also those who just enjoyed being officious, but that hardly qualifies as a key characteristic of leadership either. Any remotely rebellious behaviour or creative thinking automatically disqualified you for the position.

The prefects of my experience would have made perfectly good accountants, lawyers and administrators, but they had virtually none of the characteristics of a risk taking, wealth creator. Indeed, their whole function was to impose prescribed rules on others. A more instructive survey might have been to ask Britain's most successful entrepreneurs whether they were prefects at school. I'm willing to bet that few of them were.