Spending fears linger despite sales rebound

A rebound for retail sales last month has failed to lift worries over consumer spending in 2010 as high street warnings mount.

Fashion and homewares chain Next today joined a growing list of retailers to express concerns over the outlook.

Chief executive Simon Wolfson said the group is "extremely cautious" about sales, despite reporting an 18 per cent hike for the past year after spending held up better than expected in the recession.

B&Q owner Kingfisher added cautious comments for consumer demand across the UK and Europe, while a raft others echoed the same sentiment - including fashion retailer Ted Baker and Clinton Cards.

From the supermarket sector, Sainsbury's yesterday revealed its slowest quarterly sales growth for almost five years in the three months to March 20 and said trading conditions would remain "challenging".

While Office for National Statistics (ONS) figures from the high street suggested a marked rebound in February, a hefty downward revision for January's result left experts in no doubt that the sector is in for a tough 2010.

They believe retailers were given a welcome reprieve last year as unemployment failed to reach the worst case scenarios and many shoppers were also boosted by historically low interest rates.

Next, which raised its profit guidance several times last year, said: "The recession did not impact consumer spending as much as most people expected.

"The modest drop in employment combined with increased state benefit payments and lower interest rates meant that overall UK disposable income actually increased in 2009," it added.

The collapse of many retailers in the recession also gave a boost to those that survived - a trend Kingfisher today thanked as another factor in driving B&Q profits soaring by 79.4 per cent last year.

However, with the spectre of Government tax hikes and action to ease the national debt looming large, many are expecting consumers to rein in spending this year.

In fact the retail figures earlier this week from business body the CBI suggests this may already be happening on the high street.

A 13 per cent balance of retailers reported stronger sales than a year ago - lower than expected and well below February's 23 per cent, according to the CBI's distributive trades survey.

Meanwhile, this summer's World Cup does not bode well for some retailers.

Menswear chain Moss Bros said it is braced for tougher trading during the football tournament. Altium Securities analyst David O'Brien added: "The forthcoming general election and World Cup, the potential for a further VAT increase and sterling weakness creates a more uncertain outlook."

Economists believe the slowdown in consumer confidence could see sales growth fall into negative territory in the first quarter.

Given that consumer spending accounts for 65 per cent of gross domestic product, this will in turn hamper wider economic recovery hopes.

But economist Philip Shaw at Investec Securities said there is room for optimism: "This year should see some pick-up in earnings, a stabilisation in the number of jobs, while we suspect that the saving ratio will not rise much further, if at all.

"Our own forecast is for a 0.7 per cent increase in consumer spending this year, close to the 0 per cent to 0.5 per cent forecast range reiterated by the Treasury in yesterday's Budget."