Retailers cautious as slowdown is predicted in consumer spending

Next, Britain's second-largest fashion chain, said it expected a fall in first-half underlying sales to deepen in the second half, and warned shoppers also faced a hike in clothes prices next year.

Carpetright, Britain's biggest floor coverings chain, also reported a drop in underlying sales and said it was planning for spending to stay subdued for the rest of 2010.

"There has been a noticeable cooling in retail demand in recent months," said Next chief executive Simon Wolfson.

"We believe that consumer spending will be more restrained in the second half than in the first."

British consumer spending has been showing signs of picking up as the country emerges from a long and deep recession. An industry survey last week showed retail sales rose at their fastest for three years in July.

However, another poll also showed consumer confidence falling to its lowest in almost a year, flagging a possible slowdown in demand that could have worrying consequences for the economic recovery as household spending accounts for about 60 per cent of gross domestic product.

Mr Wolfson stressed he did not see a repeat of the plunge in demand that characterised the low point of the recession in late 2008.

"We're talking about a modest slowdown rather than an armageddon scenario," he said.

However, he warned that clothing prices could rise by 5-8 per cent early next year, due to higher cotton prices, a lower US dollar and a rise in VAT sales tax in January 2011.

"Sales are going to be difficult for the foreseeable future," he said. "The outlook for the high street retailers is not good given the forthcoming VAT rise, and cost price inflation, which will put further pressure on already subdued consumer demand," said Collins Stewart analyst Greg Lawless.

Next, which runs more than 500 stores in Britain and Ireland, said sales at shops open at least a year fell 1.5 per cent in the 26 weeks to July 31, and forecast a decline of 1.5- 4.5 per cent for the second half.

But it also reported a 7.8 per cent increase in sales at its Directory home shopping arm, and said growth there would help it lift full-year profit by 6-11 per cent to 535m-560m.

Carpetright said sales at British and Irish stores open at least a year fell 3.4 per cent in the 13 weeks to July 31, compared with a 1.5 per cent rise the previous quarter.

"We remain cautious about the outlook for consumer spending for the balance of the year," said chairman and chief executive Philip Harris.