Shops braced for cold Christmas but fear worse in 2008

British retailers are facing a tough Christmas as shoppers feel the pinch of rising living expenses. But experts warn that the real crunch will come in 2008.

The British Retail Consortium says that there is "clearly nervousness" among its members in the run-up to Christmas, with consumer spending under pressure from higher mortgage costs and utility and tax bills.

All the evidence shows that retailers have been discounting goods and offering promotions over the past few weeks to counter weaknesses in high-street spending.

Asda has trimmed £150m off prices, selling Christmas puddings for 98p. The company said the cuts were "earlier than ever before".

Business groups and analysts are forecasting a flat Christmas, showing a "slight improvement on last year", when like-for-like sales rose 3 per cent in value terms or were flat in real terms.

John Baillie, of the general retail team at Société Gé*érale, said: "The consumer will continue to spend over Christmas. The unknown is next year."

Sir Philip Green, who unveiled broadly unchanged year-on-year results at Topshop owner Arcadia last Thursday, declined to predict whether Christmas would be good for retailers, but said next year could see a consumer downturn.

Home Retail Group, owner of Argos, reported a 40 per cent leap in pre-tax profits last week, but analysts raised concern at the discounting that may be needed to stimulate demand over Christmas.