Sheila and Keith Gregory have been running a toyshop for more than 20 years. Their store on the high street of Fleet in Hampshire sells everything from rocking horses to big branded toys like Playmobil and Sylvanian Families.

Independent shopkeepers like the Gregorys have every reason to fear that this year their Christmas trade could be the worst in living memory. After all, the economy is on the brink of recession and consumers are becoming worried as job losses mount.

But for now Sheila Gregory is putting on a brave face. “Trade has not been as bad as we would have expected. In the past five or six weeks turnover has even been slightly up on last year. I guess people will still find money for their children at Christmas,” she said.

Gregory hopes that high petrol prices may even help smaller retailers as shoppers abandon costly trips to bigger towns and regional shopping centres in favour of buying their gifts locally.

And she shrugs off comparisons with previous downturns: “So far it has been nowhere near as bad as the recession of the early 1990s. Last time interest rates were so high that it was very frightening for people – but now they are much lower and are coming down. And in the 1990s people didn’t earn such big salaries and have the same level of disposable income they have today.”

Verdict Research is less optimistic. In a new report it predicts that spending will rise only 2% this festive season – the second-lowest growth rate in 20 years as consumers tighten their belts. If spending on food is stripped out, sales are expected to fall for the first time in a decade.

Richard Hyman, strategic adviser to Deloitte’s consumer-business team, is the most pessimistic he has been in years.

“People have been saying every year for some years that it is going to be the worst Christmas, but I haven’t joined in,” he said. “But this time I think it is going to be very, very poor. Retailers have ordered much less stock for Christmas because they are worried about having it left unsold come January. It underlines the lack of confidence out there.”

Tony Shiret, retail analyst at Credit Suisse, is equally gloomy. “I can’t imagine Christmas is going to be very good,” he said. “But most retailers know that and have been buying stock accordingly.

“The volatility and unpredictability makes it hard for them. How they do will depend on whether they saw the steam-roller coming up behind them or whether it’s a surprise now that it is running over their feet.”

Despite the dire predictions, analysts concede that, as usual, Christmas will divide retailers into winners and losers. Discount and value chains are expected to end up in the winners’ enclosure, grabbing market share from higher-priced competitors as shoppers trade down for bargains.

The internet is also tipped to do well, with festive sales forecast to rise from £5 billion to £7 billion.

Analysts believe that supermarkets will be the best performers this season because they offer a wide range of food and nonfood items at competitive prices.

“People feeling the pinch believe that the supermarkets will do Christmas cheaper – they are becoming much more of a one-stop shop – much more so than last year,” said Tarlok Teji, Deloitte’s head of UK retail.

One chain that sits in the sweet spot of both trends is Aldi, the discount supermarket. It is beginning to win over middle-class shoppers eager to grab a bargain and that is feeding through to faster sales growth.

In 2006-7 the chain was growing sales at 15%-20% a year. So far this year sales have grown 26% and in the past three months they have soared by more than 30% as price-conscious shoppers have switched to Aldi amid the deepening economic gloom.

The supermarket attributes part of its success to an advertising campaign featuring television chef Phil Vickery which urges customers to “change your supermarket rather than your lifestyle”.

Paul Foley, Aldi’s chief executive in UK and Ireland, said the campaign has fed through to big sales increases for top-end luxury products such as smoked salmon, foie gras and champagne.

Richard Kirk, chief executive of value-fashion chain Peacocks, is also cautiously optimistic. “I’m not as gloomy as most,” he said. “We are benefiting from a trading down in the market from more expensive shops. We have seen a positive sales performance in the past few weeks – it’s just a question of whether that will continue.”

Back on the high street trade is tough, however, and retailers are already slashing prices to woo consumers. Many big chains have been offering as much as 70% off on selected days, even though there are still two months to go before Christmas.

Jonathan Pritchard, retail analyst at Oriel Securities, said: “What has happened in the past six weeks has shocked a lot of companies and alarmed shoppers,” he said. “I don’t think they will bounce back easily.

There is employment uncertainty, high inflation and people have less money to put towards Christmas. I would not be surprised if some retail names that are in the Oxford English Dictionary go bust this year.”

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