LONDON BRIEFING: The celebrations over positive retail results could be cut short by the looming pandemic

THERE WAS a rare sighting of good news in the City of London yesterday as two of Britain’s leading companies, fashion retailer Next and supermarket chain Morrisons, rushed out positive updates.

Dealers were caught on the hop by the unscheduled alerts on the upside – and from not one, but two FTSE 100 companies.

The story at Next is of sales boosted by the heatwave, while at Morrisons recession-beating ranges are attracting new customers. That was underlined by the latest industry data showing Britain’s fourth-largest food retailer continues to outperform its larger rivals, pushing its market share ahead by 0.4 per cent to 11.6 per cent.

The timing of the sales boost could hardly have been better for Next, coming as it did ahead of its summer sale period. The upturn of the past few weeks means the fashion retailer has gone into its clearance with less stock to shift at discounted prices, hence the margin improvement. At Morrisons, margins are also being strengthened by bigger-than- expected savings from its store modernisation programme.

Translate all that into profits and Morrisons is on course to make some £70 million (€80 million) more than initial estimates, taking its full-year total to somewhere in the region of £750 million. Next is adding £15 million to both its first- and second-half forecasts, putting the company on course for about £400 million for the full year.

Morrisons shares surged by 9 per cent, helping the FTSE 100 record its seventh consecutive day of gains, underscoring the new mood of optimism that last week saw London’s leading shares climb more than 6 per cent.

Celebrations in the City have a habit of proving premature, however. Most market experts believe the worst of the financial crisis is behind us, although further shocks cannot be ruled out. And there is one very large problem looming over the economy, a problem alluded to yesterday by Next boss Simon Wolfson, which might just account for the fact that, as the rest of the retail sector surged, Next shares headed south.

The big imponderable over the coming months is swine flu. Next has not included any impact from the spread of the virus in its upbeat forecasts as it has, as yet, seen no material impact. But with Britain now the worst-affected country in Europe, and infection rates rising by the day, Wolfson warned that its figures will be vulnerable if shoppers should desert the high street.

It is impossible at this stage to assess the impact of swine flu on Next or other companies. That will depend on how fast the virus spreads and on how the death rate progresses. At the moment, employees are turning up to work as usual, and those who have contracted the virus are returning to their offices or factories after an uneventful week or so off. At the moment, there is no panic – some people are using face masks on the tube but they appear to be mostly tourists and there are no signs that the “worried well” are staying away from work or shops.

But that could change radically when the virus really takes hold in the autumn, or sooner if the death rate were to rise significantly.

There is already talk of keeping schools closed in September. That would prove a double blow for retailers such as Next, as it would not only keep a sizeable proportion of its staff at home to look after the children, but its customers too.

The overall impact of swine flu could derail the recovery and push the UK into its worst slump since the 1920s, according to Ernst Young’s Item Club. Under a worse-case scenario of half the UK population being infected, growth could slump by 7.5 per cent, of which three percentage points would be due to the virus, the forecasters say. Consumer spending would fall sharply as people took to their beds or stayed away from public places.

The Item Club’s grim prognosis echoes another gloomy report by Oxford Economics, which warned last week that the pandemic could cost the UK economy as much as £60 billion, extending the recession by two years.

Fiona Walsh writes for the Guardiannewspaper in London