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UK retailers say talk of economic recovery premature

Customers shop in the F&F clothing department at a Tesco Extra supermarket in Watford, north of London August 8, 2013. REUTERS/Suzanne Plunk
Customers shop in the F&F clothing department at a Tesco Extra supermarket in Watford, north of London August 8, 2013. REUTERS/Suzanne Plunk

By James Davey

LONDON (Reuters) - Some of Britain's biggest retailers on Thursday cast doubt on an imminent consumer recovery, saying they expected spending to remain subdued until wages started to grow ahead of inflation, which could be at least a year away.

Next , Britain's No. 2 clothing retailer, Wm Morrison Supermarkets , the nation's No. 4 grocer, and Home Retail , its largest household goods retailer, said early signs of economic recovery, such as an easing in the credit market, were yet to have an impact on consumers' pockets.

"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," Next Chief Executive Simon Wolfson, a prominent supporter of Britain's ruling Conservative Party who sits in the upper house of Parliament, 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.

Next posted an 8.2 percent rise in first-half profit, with a strong performance from its Directory internet and catalogue business offsetting sales falls in traditional stores. It maintained its guidance for full-year total sales growth of 1.5-3.5 percent.

Morrisons reported a 10 percent drop in first-half profits, hit by its late entry into the online and convenience store markets and also cut its capital expenditure plans, as its shifts spend to the new channels.

Though it is budgeting for "no significant change to the challenging economic environment in the near future," it expects an improvement in its sales performance in the second half and forecast a full-year outcome in line with expectations.

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.

WEATHER BOOST

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

J Sainsbury , Britain's No. 3 grocer, and B&Q owner Kingfisher , 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.

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.

"Whilst we continue to expect consumer spending to remain subdued, we approach the important Christmas trading period in good operational shape," said CEO Terry Duddy.

Employee-owned John Lewis , 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.

Andy Street, managing director of the department stores division, said shoppers were still being careful in how they spend. "They're willing to spend on big purchases .... but what we're definitely not seeing is a return to what I would describe as conspicuous consumption."

Elsewhere, online grocer Ocado , 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 , posted a 12.3 percent rise in full-year profit.

At 1030 GMT, shares in Next were up 0.1 percent, Morrisons was up 3.5 percent, Home Retail was up 2.9 percent, Ocado was down 0.1 percent and Dunelm was down 0.5 percent.

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

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