Will this be the last hot Christmas for the UK?

On seasonal prospects for the Retail sector

It feels fizzy, doesn't it? Falling unemployment, stable prices for consumer goods and many consumer services, a solid increase in real personal disposable income, the wealth effect from rising house prices, the lagged impact of the windfall gains from the building society conversions - a series of features have come together to boost the feel-good factor this Christmas. So it would be astounding were it not to be a good season for the retailers.

But what happens next? There is a whiff of fear in the air, and not just in the City where there is a nagging doubt that the bonuses this year will be the last good haul for a while. The OECD is downgrading its forecasts for growth next year - though domestic conditions in the UK are not a major part of the down grades. Meanwhile, there are just the few odd pre- Christmas sales around, reminiscent of the desperation of retailers in the last recession, and puzzling in the middle of what the figures say is a boom.

Let's stand back a moment and try and identify what we really know for sure, what we can reasonably guess, and what we cannot possibly know. We know the big ticket story: you can see that in the graph on the left, showing the last three years of car sales. It is a pretty jagged trend, to be sure, but the general direction is nevertheless securely upwards. In particular there does not seem to have been the usual autumnal slump - November cars sales were up 13 per cent on last year, the highest on record.

Now look at the CBI distributive trade survey and the John Lewis weekly sales growth on the other graph. The CBI series gives a good indication of the mood among retailers, because it is asking questions of retailers rather than dealing in hard data, while the John Lewis figures give a very precise and speedy set of hard numbers from an admittedly narrow base. Both show a fall-off in sales in November, but as the Merrill Lynch team (who pulled together these numbers) point out, the trend in sales has been particularly volatile this year, with the collapse in September (probably associated with the death of Diana, Princess of Wales) and the bounce-back in October. And as noted above, there is just a faint twitchiness in the latest reports from the shops: some are going wonderfully, but there is hesitation elsewhere.

Now we move towards the areas where we have to make a decent guess. We do know that retail demand generally is pretty strong, and we also know that there are pockets of resistance. We can therefore deduce that prices are particularly important: the world of very low inflation (and falling prices for consumer electronic goods) has taken pressure off the buyer to move fast.

Indeed, the reverse effect happens: the longer the buyer dithers, the more likely he or she is to find that next time the price is lower - not an incentive to rush out.

We also know that the windfall gains will not be repeated: thanks to these most buyers are not "liquidity-constrained" at the moment, but they know that next year will not be the same. When a big ticket item has fallen dramatically in price - foreign holidays are a good example - sales whizz away. But, overall, there is a repeat of the phenomenon of three years ago when every time sellers tried to up prices, sales slumped.

Looking ahead, we can make a reasonable guess that next year will be much quieter than last. Forget for the moment about the possible slower growth, forget about the (very real) chance that unemployment may be rising in the second half of next year, we know that the windfall effect will be over. That alone will ensure a consumer slow-down.

What has happened is the National Lottery in reverse. When the lottery began, it sliced a chunk out of retail spending and put it, after a time- lag, into long-term capital investment projects. The windfalls take a chunk of money out of UK Inc. and put part of it into consumer goods. It took about 18 months for the lottery effect to work its way through the system, and I guess it will be about the same for the windfalls. By next summer we will be back to normal.

So we can be pretty sure that there will be domestic reasons for a pause next year. What we cannot possibly know is whether that pause will develop into something more sinister. Candidates abound which might tip a pause into a plunge: the (maybe) five-year Far East recession; the end of the long bull market in the US; a new dip in continental Europe, where demand at present is only being sustained by strong exports.

What worries me is this agglomeration of potential negatives from abroad - the string of big things which might go wrong. Not all of them will; maybe none of them will. But the list of things which seem likely to turn out better than expected is shorter and mostly domestic: still-low inflation; a current account still in surplus; and ... no, I think that is about it.

Conclusion? This is going to be an unusual Christmas in the sense that Christmas 1998 will almost inevitably be a more sombre affair. That is not to predict economic disaster next year, which instinctively I think is unlikely, for there will be too much momentum in the economy through the first half of the year for that.

What I think will happen is that the twinges of concern evident now will become more marked. Some sectors, particularly those where competition and the strong pound continues to drive prices down will continue to prosper. Others, in particular those supported by one-off gains (be they from building society conversion or City bonuses) will have a much tougher time. I would, for example, be surprised if car sales next autumn are as strong as they have been this one, or foreign holiday bookings for 1999 will be as buoyant as bookings for next summer.

For next year is the year when the economy comes off the curve: when it has to adjust from faster-than-trend growth to, if things go right, trend growth, and if things do not, below trend growth. It is always difficult making that transition and we cannot assume that the new team at the Treasury and the new team at the Bank of England will be able to micro-manage it particularly well.

Meanwhile, we should all remember the lessons of the early 1990s and be aware that booms do not run on for ever.