Shoppers expected to keep spending in 2011

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The Independent Online

Higher taxes and sharp public-spending cuts are unlikely to faze British shoppers, which bodes well for the prospects of traders on Britain's high streets next year, a report suggests.

The Christmas period is forecast to see an overall growth in retail sales of 3 per cent, while growth for 2011 is estimated at 2.8 per cent, according to the accountant BDO. Though VAT is set to rise to 20 per cent from the current 17.5 per cent in January, the firm said it was "convinced that there will be no fall in sales next year". The City is less optimistic, predicting 2.5 per cent growth over Christmas, and less than 2 per cent growth over 2011.

Don Williams, BDO's head of retail, said: "The UK has one of the most competitive retail markets in the world, and that makes UK retailers very good at what they do. We are a nation of shopkeepers catering for a generation of shoppers."

But shopping will cost more, particularly when it comes to clothing. In addition to VAT, retailers are faced with greater costs for raw materials. Cotton prices, for example, are at 15-year highs. This is likely to put a strain on retail margins and push up selling prices. BDO's analysts acknowledged that this may well "come as shock" for consumers accustomed to years of retail-price deflation.

That said, the analysts argue that many retailers will be able to offset these pressures by taking action such as tweaking their supply chains and mounting clever promotions.

The accountant is also predicting more overseas spending by British retailers and at least one "mega-deal" in the sector in 2011, saying: "A high street brand such as Argos could be snapped up as investor confidence grows and larger outfits consolidate."

Online retailing is expected to continue growing in 2011, although the recent trend of high double-digit growth rates may moderate as retailers contend with tough comparatives.

In terms of the regional breakdown, the spread of public-spending cuts is likely to lead to "some large variations" in consumer spending patterns around the country, with London and South-east England forecast to outperform.

Elsewhere, the prospect of further weakness in the US dollar relative to sterling suggests that retailers sourcing in dollars should see some currency benefits over 2011.

The expectations follow what BDO characterised as the "phoney war" of 2010, with retail spending remaining resilient despite predictions of a dramatic slump.

"Despite some very tough talk from the new Chancellor, the coalition Government was broadly welcomed," the firm said, noting that while consumer spending did weaken, "it did not collapse" because shoppers were supported by low interest rates and constrained levels of unemployment.