Britain’s consumer-led recovery is being driven by unsustainable levels of borrowing, one of the retail sector’s highest profile bosses has warned.
Lord Wolfson, chief executive of high street stalwart Next, also pointed to the potential “shock” from higher interest rates as he unveiled a double-digit rise in the fashion chain’s profits, putting it on track to overtake Marks & Spencer.
Wolfson, a prominent supporter of the Conservative Party, said: “Whilst the economy is getting better, we need to recognise that last year’s growth was driven very much by credit and that can’t go on forever.
“Until we see significant increase in the supply side of the economy – profitable investment and improved productivity – we cannot bank on a return to sustained growth.”
Recent official data and business surveys have pointed to an improving outlook for consumer spending, which underpins a huge slice of gross domestic product, though some retailers remain cautious.
Wolfson said he was encouraged by recent data showing little or no decline in real earnings. But he expressed concern at the prospect of an interest rate hike, which may come as soon as the first quarter of 2015, dampening the consumer economy.
“My big concern, particularly in the south-east [of England] where people have borrowed a lot of money on their homes, is that people have got used to very low interest rates and any rise will come as something of a shock,” he said.
The group, with more than 500 stores in Britain and Ireland and almost 200 overseas, posted an 11.8 per cent rise in full-year profits to £695 million – putting it on course to overtake M&S for the first time in its history.
The milestone performance comes after impressive Christmas trading, which helped sales across its Next Directory catalogue and online division leap 12.4 per cent while its stores notched up growth of 1.7 per cent.
The firm is now likely to make more money than high street rival M&S for the first time since it launched in 1982, with M&S predicted to see its underlying pre-tax profits fall to around £628m.
Next is expecting profit growth over the course of the current year of between 5 per cent and 11 per cent, which would take its earnings haul to as much as £770m.
But the group added a note of caution, telling investors: “The consumer economy has steadily improved over the last year.
“However, conditions are likely to remain far from buoyant and there are real risks to the sustainability of the recovery.”
Next is increasing its full-year dividend by 23 per cent to 129p, in addition to special payout of 50p made in February. It has also announced a further special dividend of 50p, which will be paid in May.