Too early to say if retail sales boom has staying power

The upbeat news is welcome relief for shopkeepers large and small who had feared that Christmas would be a bloodbath if cash-strapped customers refused to splash out.

It also all but confirms that the recession ended in the final quarter of last year and that the British economy is finally growing again after the longest slump on record — a feeling certainly shared by David Kern, chief economist at the British Chambers of Commerce, who says: "We are on the brink of leaving recession."

But it would be foolish to get carried away. Although the UK is on the road to recovery, the road looks worryingly bumpy. Take the retail sales figures for last month.

It would have been nothing short of a disaster if they were worse than in December 2008 when the recession was entering its most vicious phase and sales fell off a cliff after the collapse of Lehman Brothers.

In other words, this recent strong performance is not quite as impressive as it first appears. Higher food prices also accounted for some of last month's improvement and analysts reckon sales were helped by the looming increase in VAT, which was put back up to 17.5 per cent on 1 January having been temporarily cut to 15 per cent to boost spending.

If shoppers splashed out in December to beat the VAT hike, it bodes ill for sales this month and the rest of this year. Another rise in VAT, possibly to 20 per cent, could follow the general election, no matter which party wins. "There is a risk that a healthy December may be only a temporary respite on the painful road to recovery," Stephen Robertson, director-general of the BRC, says.

And as ever with Christmas, there will be winners and losers.

The big loser so far looks like Marks & Spencer while winners include the likes of John Lewis and Ted Baker.

Helen Dickinson, head of retail at KPMG, explains: "Christmas really provided an opportunity for strong retailers to strut their stuff and, although the stream of trading updates has only just started, we will see a pronounced polarisation between retailers who got the proposition right and those who did not."

The concerns in the High Street reflect those across the UK's entire economy.

There is certainly good reason to be optimistic about the outlook for the next 12 months and beyond. Output has fallen a massive six per cent in the recession, which means there is room for the economy to grow at a decent rate before it hits the buffers again. Indeed, the economy grew by more than two per cent in the first year after each of the last three recessions, in 1976, 1982 and 1993.

But there are headwinds which are likely to hold growth back this time around.

Interest rates are at record lows of 0.5 per cent but could well be on the rise again by the second half of the year. Households are still burdened with debt after the borrowing binge of the last decade. Many will rein in spending until they feel more secure.

The recent rebound in consumer confidence already looks to be running out of steam. Banks are not lending as much as they have done in previous years, starving businesses of the lifeblood they need to survive, grow and create new jobs.

And tax rises and spending cuts after the election, which must be held by June, will hamper growth in the second half of the year just as the prospect of them will hamper growth before then.

Today's bullish retail sales figures seem to show that the UK is on the mend after the longest and deepest downturn since the Second World War.

But as Jonathan Loynes at Capital Economics says: "There are a number of sizeable potholes in the road ahead. Continued pressure on households to pay down debt, lingering constraints on the availability of credit and the looming fiscal squeeze all suggest that the road back to economic strength will be rather slower and bumpier than that seen after some previous recessions."

The recession may be over, but a meaningful recovery is a long way off.

Winter wonder on UK's high streets: stores and like-for-like sales growth

Debenhams: 0.1%

Dunelm: 15.4%

Game Group: -13.8%

Ted Baker: 19.1%

John Lewis: 15.8%*

Majestic Wine: 11.7%

Next: 1.6%

Marks & Spencer (non-food): 1.2%

*JLP/WAITROSE includes new stores