Jan.10, 2010

It's a strange recession when retailers report record Christmas sales. With the banks on the critical list and 2.5 million people unemployed, growth in retail sales – and in house prices for that matter – is pretty counter-intuitive.

It's tempting to see the strong performances from the likes of John Lewis, Sainsbury and Next as a comforting sign that the recession is not as bad as feared. Tempting, but wrong. The apparent boom in sales is not quite what it seems: for a start, the stores reporting are the survivors of a cull that has seen the disappearance of household names such as Woolworths and Borders. There are other factors at play: London stores have seen a fillip from the weaker pound, which has attracted tourists, and some shoppers have accelerated purchases before the VAT discount is removed.

But the main driver is that for most people still in work, rock-bottom interest rates have increased their disposable income. Lower mortgage payments are also underpinning the housing market, enabling borrowers and buy-to-let-landlords to keep properties they might otherwise be looking to sell – and when home values seem solid, people are much more inclined to spend.

On a short-term view, this retail resilience is a good thing, but it also demonstrates how New Labour, for all its talk of prudence, allowed the savings ethos to atrophy, aiding and abetting the consumer culture. We carried on shopping at Christmas because retail therapy has become a leisure activity, a means of papering over existential angst, a quasi-religion.

It's interesting that the hullaballoo about retail sales came at the same time as a little-noticed announcement about the rebranding of the government's proposed pension plans for the modestly-off, which will be known as Nest, or the national employment savings trust.

But a nice egg logo will not change the fact that this government has undermined the rationale for long-term saving. People's faith in pensions has been systematically debased and destroyed, in a series of actions from the tax raid on dividends to the shoddy treatment of victims in the Equitable Life scandal.

Families are making some effort to rebuild their balance sheets. The savings rate has risen, from minus 0.7% in the first quarter of 2008, to 8.6% in the third quarter of last year, but that has barely made a dent in debt burdens, which still stand at 155% of incomes, well up on 105% a decade ago.

But other than the sheer fear factor, there is little incentive to save when economic policy is geared to support borrowing, both on an individual and a national level.

The punishment meted out to savers is a serious problem. Building societies, which have to raise a large proportion of their funds from retail depositors, are in crisis. Company pension funds, including those at state-owned banks, where liabilities run into billions of pounds, are deep under water. And on top of the derisory rates on deposits, people have to jump through hoops even to open a new savings account, as every depositor is treated as a potential money-laundering terrorist.

No wonder people with money and a good credit rating are still investing in property – and people with neither are still shopping.