September 12, 2013 / 2:52 PM / 4 years ago

UK retailers say talk of economic recovery premature

LONDON (Reuters) - Some of Britain’s biggest retailers on Thursday cast doubt over signs of economic recovery, saying consumer spending - the largest engine of growth - was likely to remain subdued until wages rise ahead of inflation, which could be over a year away.

Next (NXT.L), Britain’s No. 2 clothing retailer, Wm Morrison Supermarkets (MRW.L), the nation’s No. 4 grocer, and Home Retail HOME.L, its largest household goods retailer, said early indications of a recovery, such as a pick up in lending by banks, were yet to have an impact on consumers’ wallets.

“For most people - and we’ve got 12 million customers - at the end of the month there’s no more money in their pocket,” Morrisons Chief Executive Dalton Philips told reporters, noting that higher levels of spending in the London area were not indicative of the rest of the country.

Next CEO Simon Wolfson, a prominent supporter of Britain’s ruling Conservative Party who sits in the upper house of Parliament, was similarly downbeat.

“While there is some relief in the economy, I think it would be a mistake to characterize that as a full blown recovery because a recovery will require growth in real earnings not just more borrowing,” he told Reuters.

He reckons a return to earnings growth ahead of inflation will take at least a year and warned a loosening of the mortgage market alongside government housing market stimulus measures looked likely to result in an “unhelpful house price bubble”, which would be a drag on the economy when interest rates rise.

On Monday, British finance minister George Osborne said the UK economy had turned the corner and that its growth vindicated the government’s austerity program.

However, on Thursday Bank of England Governor Mark Carney warned signs of recovery could prove to be another ”false dawn.

Morrisons reported a 10 percent drop in first-half profits, hit by its late entry into fast-growing online and convenience store markets. It also cut capital expenditure guidance to reflect a shift in investment to the new channels and away from traditional stores, and kicked-off a review of its 9 billion pounds ($14.2 billion) property portfolio, which could potentially raise some money for shareholders.

Though it is budgeting for “no significant change to the challenging economic environment in the near future,” it expects a better second-half performance and a full-year outcome in line with expectations. Morrisons shares rose up to 5 percent.

Next posted an 8.2 percent increase in first-half profit but was reliant on a strong performance from its Directory internet business to offset sales falls in traditional stores - a growing theme across Britain’s retail sector. It maintained its guidance for full-year sales growth of 1.5-3.5 percent.


    While official data and surveys have shown an improving outlook for UK consumer spending, which generates about two-thirds of gross domestic product, retailers remain wary.

    J Sainsbury (SBRY.L), Britain’s No. 3 grocer, and B&Q owner Kingfisher (KGF.L), the No. 1 home improvement group, both said this week it was too early to call a UK recovery, with Sainsbury’s describing strong trading across the grocery industry in the summer as “a blip” due to helpfully hot weather.

    Also on Thursday, Home Retail posted weather-assisted second-quarter underlying sales rises of 2.7 percent and 11 percent at its Argos and Homebase businesses respectively, but was still cautious. “We continue to expect consumer spending to remain subdued,” said CEO Terry Duddy.

    Employee-owned John Lewis JLP.UL, which runs department stores and the upmarket Waitrose grocery chain and has a bias to the more-affluent south east of England, posted a 4 percent rise in first-half profit and said it expected to trade positively in the second half.

    “What we’re definitely not seeing is a return to what I would describe as conspicuous consumption,” said Andy Street, managing director of the department stores division.

    Elsewhere, online grocer Ocado (OCDO.L), which struck a joint venture deal with Morrisons in May, reported a 16.4 percent rise in third quarter sales in line with expectations, while home furnishings retailer Dunelm (DNLM.L), posted a 12.3 percent rise in full-year profit.

    ($1 = 0.6324 British pounds)

    Additional reporting by Neil Maidment, Sarah Young, Paul Sandle and Kate Holton; Editing by Mark Potter

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