Retailers warn of recession but shoppers shop on

Retailers may intensify calls for interest rate cuts to revive the consumer after the latest grim data from their industry club, but reports of the death of the high street are more than a little exaggerated.

In his commentary on the May high-street sales figures published by the British Retail Consortium, Director General Kevin Hawkins provides a bleak analysis of a 2.4 per cent fall in like-for-like sales.

"While some analysts still claim that the continuing weakness in retail sales is only a 'blip', these figures should remove any lingering doubt that we are now in a consumer-led recession," Mr Hawkins said.

Along with many of its powerful member retailers, the BRC is an advocate of a cut in interest rates it believes would help counter what is undeniably a slowing sales trend in retail, long the prime motor of the British economy.

But is the picture really that bad? The BRC's own data, which is provided by the consortium's own members and then collated by consultants KPMG, suggests it may not be.

Unlike the whopping 4.7 per cent April fall, which was corrupted by calendar effects, May's 2.4 per cent like-for-like decline is a clean figure.

It's not a great performance by any standards, but it's worth bearing in mind that the comparable May 2004 figures came at the end of an unprecedented consumer boom and included a surge in spending prompted by good weather and the Euro 2004 soccer championships.

The like-for-like figures also disguise the fact that overall retail spending - including new retail space - actually increased by 1.2 per cent in May and by 2.1 per cent in the March-to-May quarter.

These increases are paltry by recent standards, but they are increases nonetheless, and media headlines of "the worst May on record for a decade" are more than a tad misleading.

The fact that many retailers are opening new stores in the race for out-of-town space inevitably dilutes turnover in the existing outlets measured by the like-for-like figure, an effect recognised by fashion chain Next when it split out sales figures for stores "not affected by new space".

"There's still considerable spending going on. I wouldn't describe these numbers as a consumer-led recession or a disaster for retailers, I would talk about consumer caution," said Richard Lloyd-Owen, head of the consumer business practice at business advisory firm Deloitte.

"Many retailers would have come into the year talking about a slowdown in consumer spending. That doesn't mean it doesn't hurt them when it happens, but you can overstate the extent to which this is a recession or terrible gloom," he said.

There is no question that market growth is slowing. But neither is there any doubt that the market is still growing, so talk of a fall in consumer spending is simply wrong. It's growing at a slower rate.

To keep it growing, retailers have had to slash prices. Retail consultancy Verdict says high-street prices will fall by 1.4 percent his year, with out-of-town chains and internet retailers cutting prices by much more.

This phenomenon, known as price deflation, probably hits the sellers of discretionary goods such as technology and furniture harder than the slowdown in spending itself. Add to this the cost inflation caused by rising wages and rents, and no wonder some of the BRC's members are hurting.

Some, but not all. While Tesco Chief Executive Terry Leahy supports the call for lower interest rates, and while his company is one of the main drivers of price competition and price deflation, all the signs are that the UK's largest retailer is healthier than ever.

And while Verdict expects the loss of thousands of retail jobs, it still sees a whole group of value retailers such as including Primark and New Look that will benefit from the consumer's increased sensitivity to price.

The textbook definition of economic recession is two quarters of declining gross domestic product. As it is, the British economy has recently been growing at a steady pace.

While there is no doubt that a protracted absolute decline in the total value of the retail market would be damaging to this trend, this seems some way off.

In fact, even the BRC's like-for-like figures may well improve as the year goes on, given that the downturn towards the end of last year will make comparisons easier during the autumn.

As a representative of the industry, the BRC's call for lower interest rates - "crying wolf", as industry analyst Nick Bubb puts it - is understandable, although economists say this is likely to fall on deaf ears.

Coming at the end of a decade of vigorous growth on the high street - much of which was fuelled by mounting consumer debt - it is hardly surprising that the growth rate has eased and that many retailers are making lower profits.

This may make the retail sector, which has outperformed the London market by almost 50 per cent in the past five years, rather less attractive to investors. But it does not mean an end to spending or economic growth.