Seven days that shook the British high street

It was a week that most retailers would probably prefer to forget – seven days that shook the high street. From the grandest names to the most minor, the news has been uniformly grim.

Yesterday, the mighty John Lewis reported that its sales are running 9 per cent down on last year. Marks & Spencer, still Britain's leading clothes retailer, warned on Wednesday of sharply lower sales and profits, and promptly saw a quarter of its stock-market value wiped out. Last week also witnessed the bankruptcy of ScS, a medium-size furniture retailer, and ProCook, a chain of 39 cookery shops. The Society of Motor Manufacturers and Traders says private sales of new cars are almost 12 per cent down on last year.

Bradford & Bingley narrowly avoided the fate of Northern Rock on Thursday evening, when its efforts to raise fresh capital fell through for the second time and yet another rescue package had to be cobbled together by the authorities.

Taylor Woodrow, the country's largest housebuilding group, also faces an uncertain future, unable to raise the capital it needs and in danger of breaking its agreements with its bankers.

The reasons for the slump in confidence and in spending are not hard to find. Consumers are poorer and are feeling poorer, as the price of food, fuel and other essentials continues to soar. The accountants Ernst &Young said that after tax contributions and monthly household bills, the average family now has less than 20 per cent of its gross income left over to spend as it wishes, compared with 28 per cent in 2003.

The Governor of the Bank of England, Mervyn King, has warned that "rising fuel, gas, electricity and food prices mean that average real take-home pay will stagnate this year. It will not be an easy time, and I know that some families will find it particularly difficult."

Others have noted another phenomenon: a trend downmarket towards value and discount retailers. Aldi and Lidl are showing especially strong growth, with sales up 21 and 13 per cent respectively in the past 12 weeks. Andy Clarke, chairman of the CBI's distributive trades panel and director of retail at Asda, pointed out that his store's market researchers had noticed that shoppers were economising especially hard in the week before pay day, and after they had filled the car up with fuel.

The collapse in the housing market has had an especially baleful impact on spending patterns. The fall in the value of property – 7 per cent since the peak last year, with anything up to a 40 per cent fall in prices forecast – has been one factor affecting the psychology of households and their ability to take equity out of their homes to spend. The collapse in transactions, down by nearly half, has had an immediate effect. As fewer people move house, so purchases of appliances and furniture are pushed lower.

Behind the troubles in the housing market lies the credit crunch and the distressed state of the world's financial system. Fearful of lending to each other, or anyone else for that matter, the traditional role of the banks in providing funds for house purchases, business investment and consumer spending is much diminished. Without a healthy supply of credit flowing into an economy, spending will slow and consumption will become anaemic, as we are seeing.

Yet there seems little that the Government or the Bank of England can do. After the previous slowdown, which set in after the collapse of the dotcom boom in 2000 and the terror attacks of 11 September 2001, the public finances were in robust health. The public spending spree that followed, especially on the NHS, helped keep the economy in positive growth territory while many other nations saw their economies shrink. Subdued inflation, helped by a wave of ever-cheaper consumer durables from China and cheap labour from eastern Europe, meant the Bank of England could keep interest rates relatively low, encouraging us to borrow and spend. Neither of those benign influences seems likely to materialise in this, much more severe, slowdown.

The UK has already broken its obligation to keep the budget deficit to 3 per cent of GDP under the EU's Growth and Stability Pact. The Government's own fiscal rules seem likely to be breached. Some economists believe borrowing could soar to £100bn a year if there is a full recession.

Rising inflation, meanwhile, is likely to push the Bank of England into raising interest rates, which can only add to the problems affecting the mortgages market.

It is the economic story of the past decade but played out in reverse, the great imbalances in the economy at last coming to a reckoning. A consumer-led boom fuelled by debt – a paradise for retailers – is turning into a consumer-led slump driven by the credit crunch – shopping hell. In 1998, oil was at $10 a barrel and the torrent from the East of low-cost goods had only just begun. Now oil stands close to $150 a barrel and, with Chinese inflation up to 10 per cent, we can no longer believe in an era of ever-lower prices for their exports.

All economies have their ups and downs. What is different now is that we are suffering from two shocks at once – the credit crunch and the commodities boom. These have given us stagnating output and rising inflation – "stagflation". The feelgood factor has evaporated, and every economist agrees that next year will be worse.

A week of miserable news

Monday

Shares in Trinity Mirror fall by more than a quarter because of a "marked" decline in advertising.

The car dealership Pendragon axes nearly 500 staff.

Tuesday

Lord Harris, head of Carpetright, right, says that next year could be the toughest in 50 years.

Wednesday

M&S shares fall by nearly 25 per cent after a profit warning. Its chief executive, Sir Stuart Rose, says: "This is the fastest and most severe slowdown since the early 1990s". Shares in builder Taylor Wimpey halve after it fails to secure a £500m emergency rescue package. The kitchen retailer ProCook goes into administration.

Thursday

Henry Paulson, the US Treasury Secretary, says: "High headline inflation numbers are a real concern to Americans." The Furniture retailer ScS sold to private equity after it goes into administration. Housebuilder Barratt axes 1,000 jobs. European Central Bank raises interest rate by 0.25 per cent.

Yesterday

John Lewis says sales down 8.3 per cent in previous week. UK car sales down 6.1 per cent in a month. Bradford & Bingley shares fall 18 per cent after shareholders have to rescue £400m funding plan.

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