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UK faces stagnation after cut-price Christmas

The economy risks contraction in the first half of 2012 and better-than-expected retail sales over Christmas are unlikely to offer much respite, as shoppers were only lured by margin-eroding discounts, business leaders warned on Tuesday.

A survey from the British Chambers of Commerce showed Britain's economy was "very likely" to contract in the first half of 2012 after stagnating in last year's final quarter due to the euro zone debt crisis.

"Today's surveys suggest the UK economy is roughly stagnant in early 2012," said Citi analyst Michael Saunders. "A quarter or two of negative growth is certainly possible but at this stage surveys do not really signal a major renewed recession."

The prognosis came as another survey showed British house prices were continuing to fall, while the British Retail Consortium said December retail sales rose a stronger-than-expected 2.2 percent -- but added the figure was flattered by snow-disrupted sales a year earlier and warned discounting could hit store profits.

"Sadly no-one expects this level of demand to be indicative of the year ahead," said Helen Dickinson, head of retail at accountants KPMG.

Britain's retailers are mostly struggling as disposable incomes are squeezed by rising prices, muted wages growth and austerity measures, and as shoppers worry about a weak housing market, rising unemployment and the euro zone crisis.

Bellwether stores group Marks & Spencer posted a 0.5 percent rise in underlying British sales in the 13 weeks ended December 31, with customers staying in and treating themselves to party food driving a 3 percent rise in food sales. That helped to lift its shares around 3 percent higher.

But its sales of clothing and homewares fell 1.8 percent, despite a raft of "25 percent off" pre-Christmas promotions to stimulate trade in unusually mild weather.

The discounting meant that to offset the impact on profit margins and meet 2011-12 profit forecasts the 128-year-old group was having to find extra cost savings.

Market research from Kantar Worldpanel reinforced the view Britons stayed at home over Christmas, reporting a 4.8 percent year-on-year rise in grocery sales in the 12 weeks to December 25. Specialist chain Majestic Wine also toasted a healthy rise in its Christmas sales.

The Kantar data showed, though, that the strongest grocery sales growth was achieved by budget chains Aldi, Iceland and Lidl, while Tesco, Britain's biggest retailer which reports Christmas sales on Thursday, may have been squeezed between the upmarket and budget chains.

Department stores group Debenhams Plc reported better-than-expected flat underlying sales over the 18 weeks to January 7, sending its shares 10 percent higher.

"2011 was my 36th Christmas as a retailer and it's no exaggeration to say that it was probably the most difficult of all I've traded to call," said CEO Michael Sharp.

With the 2012 outlook bleak, hedge funds looking for profits are circling many of Britain's quoted store groups, and fears are growing of a wave of retail failures equivalent to that which saw Woolworths go under in 2008-9.

Already this week outdoor goods group Blacks Leisure and lingerie chain La Senza UK have fallen into administration and fears over the future of video games retailer Game rose after it posted a slump in Christmas sales and warned it may breach the terms of its loans.

Homewares group Dunelm posted a rise in underlying sales over Christmas, while flooring specialist Topps Tiles saw a fall.

Retailers are hoping that falling inflation and events like the Olympics and Paralympic Games, the Queen's Diamond Jubilee, Wimbledon and the Euro 2012 soccer championships will boost demand in the months ahead.

"There's no country in the world that has five of these events in two and a half months so let's be a bit positive about that," said M&S chief executive Marc Bolland. "The consumer tells us that they're looking forward to that type of summer."

However, the industry is mindful that strong demand around a royal wedding in 2011 did not provide a lasting boost. Grocer Wm Morrison and home shopping group Shop Direct both forecast a tougher 2012 on Monday.

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