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Retail Forecast for 2012-2013
"Life is a Top which Whipping Sorrow Driveth"
(Fulke Greville, Lord Brooke, 1554-1628)
[As at February 2012]
In 2011, originally expected to be the year when the economy got back on track, retail went from bad to worse. There was little strength in retail spending. Online retail continued to cannibalise sales in shops. Christmas 2011 was noted only for constant promotions and sales. Thirty-one major retailers went bust, with almost 2,500 stores being closed and 24,000 employees put at risk. Currently there are more than 40,000 empty shops in the UK's towns and cities.
The Economy in 2011
The first half of 2011 showed clear signs of recovery in the UK. GDP had grown during 2010, consumer spending was weak but increasing and this continued more strongly into the beginning of 2011.
The second half of 2011 was poor. This was prompted partly by international fears that the Eurozone was about to crash and partly by the fact that recovery from the 2008 recession has been a weak and feeble thing with little real strength. In the final quarter of 2011, GDP actually fell by 0.2%, consumer prices were 4.2% higher than 2010, and the unemployment rate rose to 8.4%. The final GDP growth estimate for 2011 is likely to be around 0.9%, less than one-half of most original forecasts.
Consumer confidence is shot. There is tremendous pessimism at home and abroad and a feeling that nothing will ever be the same again. There is no evidence that many governments know what they are doing. Contradictory economic signals and government austerity make it hard for businesses and households to plan for the future. Even in countries which have avoided financial crisis are being adversely affected by the stagnation of trade and the uncertainties about the future. The 2008 recession has done more than create misfortune.
We feel that the pessimism is overdone, but that it is true that nothing will ever be the same again. A new action plan is needed to rebuild the economy, but there is a general unwillingness to anything more than blame the neighbours.
In the UK, many parts of the retail sector are facing a serious crisis. Continued low demand will inevitably create more bankruptcies, redundancies and rip the heart out of town centres. Some of this is certainly the normal process of retail change - but happening a bit faster. We see the next twelve months as being hair-raising for retailers.
Our Retail Forecast 2012-13
The retail forecast is dependent on the economic forecast (see next section).
2012. Retail spending for 2012 in money terms will be around 3.2%, which in real terms should be an increase of 0.9% in the real volume of retail sales. Most of this sales improvement will happen in the latter part of the year.
2013. We expect 2013 to be better than 2012 with real sales rising by around 1.6%, in monetary terms 3.9% (as long as inflation stays low).
The main beneficiaries should be clothing, DIY, H&B, pharmacy, and department stores. Very high levels of competition in electricals and grocery/food will mean that the benefits of expanding demand will be appreciated mainly by customers via lower prices rather than retail shareholders.
The 0.9% increase in real sales will mainly go to online sellers and multi-channel e-commerce retailers. Sales through bricks and mortar stores will continue to fall on average.
We expect annual inflation to fall in 2012 from 4.2% to 2.3% because the 2011 VAT increase will drop out of the calculations and fuel, food, and natural resources will be found to have peaked.
There should be some increase in wages, after several years when employees have had either a zero increase or 1%. Interest rates will stay at 0.5% for most of the year at least.
We expect the economy to improve somewhat after mid-2012 which should help confidence and put more demand into the economy.
The Centre's Economic Forecast for 2012-13
The forecast for the performance of the UK economy from the Centre for Retail Research (CRR) is in two parts:
- 2012, first half - low growth perhaps 0.2% to 0.3%, or even worse than that (perhaps the Today programme's Double-dip Recession).
- 2012, second half - good chance of the economy picking up - perhaps 0.5% - and in 2013 somewhere between 1.5% to 1.8%.
In this, the Centre is more optimistic than many other commentators. A central part of our forecast is that the Eurozone will not collapse. It will continue to do too little, too late, but just enough to deal with its problems. It will avoid collapse because Eurozone members fear the costs of collapse exceed the benefits of a collapse. The European Financial Stability Facility (EFSF) will have a theoretical €1 trillion of resources to throw at the problem.
We assume that the UK economy will improve in the second half of the year and that 2013 will be much better. UK inventories are falling and businesses will not want to postpone investment much later than summer 2012. In addition the continental markets (our largest trading partners) should have improved by mid-2012 though it would be good if they could be pro-active in anticipating the Euro's next problem and sorting it out in advance.
Quantitative easing will continue even though no one knows how or whether it works. It gives some sort of guarantee about the continuation of a market in UK government debt, but it comes at a cost. It distorts the economy, with adverse effects on pensioners, annuity rates, and savers. Meanwhile there is no evidence that businesses find it easier to borrow money.
International finance has largely left the UK and its banks alone. We assume that this will continue, although it may not. We are already seeing that austerity can increase public spending (through higher social benefits) although so far tax revenues seem buoyant (but may be cut if there is a sudden leap in unemployment). The government has already accepted that it will take longer than originally expected to halve its deficit.
How Did We Get Here?
In the ten years to 2006, the UK economy was growing exceptionally quickly (3.2% pa) by historical standards. People felt better off, but they were not necessarily actually better off.
What was the mechanism for improving the apparent condition of most people?
- A fall in retail prices, particularly for electrical goods and clothing, as production moved to China.
- Growth in new forms of retailing brought style and fashion to the high street and shopping mall at an affordable price. Online retailing had a particular effect on the markets for entertainment, books, electricals and fashion.
- Rising property prices (and stock prices) meant that households were wealthier and many cashed in part of this wealth by moving house or re-mortgaging.
- Almost unlimited credit was available from banks, retailers and credit card companies enabling people to live well even if their income was not rising or was insufficient to meet the repayments. The availability of credit acted as a substitute for real increases in wealth.
- People who had no job were reclassified as disabled or effectively unemployable. Their lives were not necessarily very good but nothing much could be done for them and they would cause less trouble.
This mechanism to increase people's living standards went into reverse when the credit crunch started: property and stockmarket prices fell, pension funds were worth less, households consumers cut spending and tried to pay off their debts, bankruptcies hit large and small companies creating further bankruptcies, it was more difficult to find work and even well-established companies started laying employees off.
Where Are We Now?
We are worse off. Although it is four years since the worst of the 2008 recession, the UK economy has not yet regained the position that it had before the recession and it may still be 1.8%-2.8% below 2008. Compared to the trend of the previous five years, the economy now is 12.5% smaller that it 'should have been' which explains why so many things are going wrong in public finances and consumer spending (see Chart 1). This means that we have lost perhaps one-eighth of potential national output because of the crisis.
Chart 1
What Growth in the Next Few Years?
Prospects are bleak. At this stage of the economic cycle, GDP growth should be running at 2% to 3% or perhaps a little under 4.0%. Chart 3, which plots UK growth since 1901, shows that average growth every year 'should have been' around 2.1% (not 0.9%).
Chart 2
Our 'optimistic' forecast of 1.5% to 1.8% for 2013 is not particularly optimistic therefore and for most of the last 20 years would have been regarded as quite negative.
The OBR (Office for Budget Responsibility) which tends to exaggerate the UK's prospects has forecast 0.7% for 2012 and 2.1% in 2013. Even in 2014 they only expect 2.4%. We'll see,
A Double-dip Recession?
People in the media keep talking about a 'double-dip' recession. It is obvious that the journey out of this recession for most western countries has been much slower than previous ones, the growth rates (even at their best) are weak and variable and there will continue to be periods of slow or negative growth. It is not an article of economic faith that GDP reductions for two successive quarters inevitably create a recession and so gloomy cries of 'double dip' every time there is a bit of a setback is stupid. We are not doomed to go back to zero or return to recession every time the economy splutters to a stop. The new 'two-quarter' definition of recession is a contingent fact of yesteryear and it certainly is not relevant for today.
Online Shopping
A second reason why retailers have been doing so badly has been the growth in online shopping. This now represents more than 10% of UK retail sales and is growing annually at around 14% to 16% per annum. That growth rate is not going to change - much - until 2018 at the earliest. As a consequence, retail sales have been diverted from bricks and mortar stores to online shops and although multi-channel retailers are working hard to integrate the work of their physical stores with their virtual stores sales in physical stores are down.
Some voices have suggested that the irresistible growth of online means that most high streets will fade away and small retailers vanish. This is not our view. We feel that there will be major changes; retailing will be very different; and it is not axiomatic that the current rate of online growth will continue for ever.
Many national retail chains are looking to trim their estate by 10% to 20% as leases expire or rent reviews become due. Essentially a company no longer needs so many shops to sell £100 million of merchandise. Third-rate trading areas and smaller towns that are mainly C2DE will be ripped through. But much will survive.
However the low growth predicted for the retail sector means that sales through shops will continue to decline, with the inevitable toll of empty stores and redundancies.
The Forecast: Some Further Considerations
- Eurozone. UK growth must depend on how quickly the Eurozone resumes growth and trades with us.
- Unemployment. Unemployment in many countries is much worse than ours, but their figures may be more honest. Older unemployed people with a bit of poor health have been put into the 'disability' figures for at least the last 20 years. In the UK there has been a sudden jump in the number of self-employed part-timers, which means that people with jobs have been made to go self-employed. It will take many years. There is a particular problem with the young, who might have 5 years of unemployment with intervals of internships and temporary work before they get a permanent job. What to do about these people ought to be one of the government's major issues.
- Business confidence. The 'animal spirits' as Keynes called the willingness of entrepreneurs to invest and to take chances are now pretty low. Business confidence is weak and companies are delaying investing as the future looks uncertain. The prognosis is poor. Businesses increasingly feel that there is no vision about what will or ought to happen over the next 2-3 years, there are lots of organisations and soundbites but no one is in control, and the political debate is taken up with side issues.
- Plan A. The austerity programmes are having a negative effect on sentiment, investment and prospects. The original idea was that the UK would be able to grow because trade with other buoyant economies would replace government spending. But this has not happened because the other economies are not buoyant. In contrast ONS figures show that government spending is actually the only high growth part of the economy.
Plan B. The situation of the UK economy is serious. We need to see faster economic growth to rebuild the economy, support manufacturing and construction and a resumption of consumer spending. Faster economic growth will need the government to put more money in people's pockets in the short term (followed by later tax increases), and in the medium term to start a large number of infrastructure/background projects aimed at improving transport, roads and rail, telecommunications, energy, science, housing, town centres, and sustainable living and working which will provide us with jobs for the future. But there is no Plan B. There ought to be one.
