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The Retail Forecast for 2013-2015
From the Centre for Retail Research
"The sun has started to rise above the hill"
( (Rt Hon George Osborne, Chancellor of the Exchequer, 2013 [Elliot & Coates, 2013]))
[As at 2 October 2013]
Our previous retail forecast for 2013 (retail growth of only 0.3% in real terms) was too pessimistic. Since its publication in 2 Jan 2013 the economy has improved, the Eurozone problems have remained manageable, and customers have started spending in the shops.
The change does not mean a return to the 2.0%+ real growth that we saw between the mid-90s and the mid-00s, but the situation is now less bad and in some ways the economy is becoming better balanced.
Our revised GDP forecast for 2013 is 1.3% (though 1.5% may prove more accurate) and for 2014, 2.0%. This forecast is dependent on there being no new problems in the Eurozone, China or the US.
Our retail forecast for 2013 in value terms is for growth of 3.9%; in 2014 3.4%; and 2015 3.4%-3.8%. In volume terms these estimates are likely to mean: 2.4% in 2013; 1.6% in 2014; and 1.6% in 2015. These estimates include online sales. Note also that estimates of inflation can also vary widely depending on whether one is using CPI, RPI or RPIJ: they are all different.
Food and Non-food: in 2013 we expect food sales growth of 3.6% (values) and non-food sales growth of 4.1%. By volume there should be volume growth of 1.6% in food volumes and 3.0% in non-food volumes. Non-food should continue to outperform food in volume terms (as has been the case since 2010, although severe competition has meant that non-food sales growth in value terms has been miniscule).
In 2014 we expect food volumes to grow by 1.0% and non-food by 2.0% whilst in 2015 food should grow by 1.1% and non-food by 2.0%.
Clothing, sportswear, homewares, DIY, furniture and curtains and floor coverings should do well as a result of the fact that consumers have a little more to spend but the housing market will grow rapidly. In contrast electronics, music, books, entertainment, and leisure will continue to suffer declines.
Are Things Getting Any Better Nationally?
GDP growth by the end of 20012 was little different from zero and it seemed as though the economy was slowing down rapidly. Even people like us (the Centre for Retail Research) who had been ultra-scornful of media talk of a 'double-dip or treble-dip recession' expected 2013 to be around 0.5% growth and the Office for Budget Responsibility (OBR) and the OECD revised their growth figures down to around 0.8%. Contrast this with the underlying real growth of GDP in the 20 years to the recession of 2.6% annually.
UK growth in the first half of 2013 has been 1.5% (ONS). Consumer spending has grown more slowly than expected in 2013 (see Fig 1), but manufacturing and construction activity have been higher than forecast: output and new manufacturing orders remain high. However manufacturing exports are still a problem and have not grown as much as expected in the last few years. In July 2013 exports fell by 6%.
Improved economic growth has meant that the Bank of England has no current plans for further quantitative easing. Interest rates remain at an historic low - lower even than in the Napoleonic wars - and this will continue for about another three years (till 2016) until unemployment falls to 7.0% from its current 7.7% of the labour force (2.487 million). Higher interest rates, it is felt, will create problems for a proportion of private households and businesses in hock to their banks, both of whom will not be able to afford the higher payments.
This problem of the zombie sub-economy has been left until later this decade - another serious mistake, we feel.
What has Higher Growth Meant for Retailers?
Retail sales have improved so far this year, although price competition is so vicious that there is little retail-inspired inflation about. The most recent ONS sales figures are for August 2013, where retail sales had risen since January by 3.2% in volume and +3.7% by value (ie including price rises). In volume terms sales had risen by 2.3% over August 2012 and 3.9% by value.
Compared to the previous two years, the overall picture is much better. In 2012 for example annual retail sales values increased by 2.8% compared to 2011 and retail sales volumes rose by 1.4%. Fig 2 shows the way that year-on-year retail sales have fluctuated wildly and often negatively since 2008, but a slight upward path since 2011 may be discerned.
Better therefore than we have seen in the past five years, but there are plenty of problems yet to come!
The Housing Market
Fig 3, covering housing new starts and completions in England, shows a catastrophic decline in new housing between 2008 and 2009, since when the situation has improved. The most recent ONS figures show 29,510 starts in 2013, quarter 2, 6% above those of the previous quarter and this growth seems to be continuing. The second leg of the Chancellor's Help to Buy programme will provide £12bn of guarantees (not subsidies) on £130bn of new mortgages. This has certainly helped the housing market to get going. In September 2013, housebuilding increased faster than any time since February 2003 (Purchasing Managers' Index, October 2013). House prices are rising: the Halifax house price index for Sept 2013 shows a rise of 2% over the previous three months, and prices in the year to July 2013 rose by 3.3% (0.8% excluding London).
Seasonally-adjusted trends in quarterly housing starts and completions, England
Will there be a bubble in house prices? The Bank of England has been given authority to watch the development of the programme: this may prevent its worst excesses. Some moderate inflation in house prices helps underpin the market, because it gives purchasers evidence that they will not lose from price fluctuations.
As noted before, a strong housing market will help non-food suppliers of housewares, curtains, floor coverings and furniture. Such businesses that have survived the long recession can expect significant increases in sales.
Consumer Confidence is Better
The GfK Consumer Confidence Survey (Table 1) shows a considerable improvement in consumer confidence since December 2011, from -33 to -10. The Confidence Index has been very very negative since 2008 and was almost -40 in Spring 2008. Although the overall Gfk index was -10 in Sept 2013, people's expectations are all positive for the next 12 months. Consumers expect the economy to pick up significantly over the next 12 months: the General Economy index has changed from -41 (Dec 2011) to +3 by Sept 2013.
We feel that for spending patterns, the overall index is unhelpful, and the key indicator is expectations about their personal financial situation over the next twelve months. This is now positive, although only +1. This suggests the individuals, as we have seen, will be more willing to spend. However consumers do not yet feel the time is right for major purchases and the change in prospects for the economy have generally improved much more than individual's expectations about their personal situation.
The Savings Ratio: Households Have Been Paying off Some Borrowings
Much of the growth in household spending pre-2008 was financed by borrowings and house re-mortgages. Between 2008 and 2012, consumers reduced credit card debt, loans and the amount outstanding on mortgages (Fig 4). Since early 2008, households have repaid £137.5 bn of mortgage debt. This was a good thing to do, but it meant that consumer spending fell by even more than the fall in real incomes.
From late 2012 however, the savings ratio (percentage of net disposable income after tax) has fallen from 7.9% to 4.2% as households have decided (or been forced) to save less (Fig 4), household unsecured borrowing rose by £5.4bn. This may be one reason why consumer spending has increased in 2013. However recent ONS figures (Oct 2013) show a growth in the savings ratio to 5.0% (caused by bonus payments, says the ONS). It seems unlikely that the savings ratio will rise permanently (particularly with effective interest rates of zero per cent), but it may remain at 4.5% to 5.0% until around 2015 or 2016 or (pessimistically) fall even more to 2.5%. In either case it should support additional household spending (at the cost of further reduction in indebtedness).
Will the good times come again?
The prospects look right:
- Improved economic growth
- Consumer confidence up
- Consumers spending more
- Saving ratio is declining
- More being spent on purchasing houses.
But - and there are a few 'buts':
- We have been here before. The economy grew well from mid-2009 into 2010, but then declined. Our prospects look rather better this time, but continued growth is not a certainty.
- The googly surprise. Anything can happen to disrupt markets, such as the US reneging on its debts, slowdown in China, a new Eurozone problem or a sharp spike in energy prices. That will throw the UK economy and most other industrialised nations off their growth paths.
- Inflation growth, causing the Bank of England to tighten monetary policy.
- Manufacturing problems - the constant British problem - could well force economic tightening by 2015. So far the growth in manufacturing has mainly been about cars and trucks, not broadly based expansion. Similarly manufacturing exports have been weak and in July 2013 fell by 6%.
- The austerity conundrum. The government plans one of the largest fiscal consolidations of any major country and plans additional austerity measure at least until 2017-18. So far all the planned tax increases and reductions in investment spending have been achieved, but only 58% of the benefit cuts forecast and 31% of cuts in current non-investment spending (IFS). When those reductions start in 2014, there will certainly be some negative effects upon consumer spending.
- For the UK, in the longer term, public spending will continue to rise until 2017-18 and national debt as a percentage of GDP will grow until 2016-17. Keeping within forecast will probably require another £25bn of cuts or tax increases after 2015, and news that the Chancellor announced at the Conservative Party Conference that he intended to start running budget surpluses by 2020 means that further cuts in public spending will be required until the end of the decade.
Will the good times come again for retailers? Probably not.
The Missing Bounceback of the UK Economy?
Fig 5 shows how the UK economy has normally bounced back about 30 months after the onset of a recession. Each curve summarises a major period from the 1920s to the 2000s. The only exception to the bounceback has been the current recession, where the economy has been broadly flat after the 30 months point. Even though 2013 has been better than expected, the GDP is unlikely to reach the level it was as long ago as 2008 until 2015-16.
THE UK BOUNCEBACK FROM MAJOR RECESSIONS 1920S TO 2000S
Gfk, Press Release: September Sees a Further Rise in the Consumer Confidence Barometer, Once Again Increasing by Three Points, 27 Sept., London: Gfk Marketing.
Elliott, F. and Coates, S. (2013) 'Osborne Plans to Clear Debt With Austerity "Until 2020"', Daily Telegraph, p. 6, 1 Oct.
IFS (2013) Cutting the Deficit: Three Years Down, Five to Go? by Gemma Tetlow, London: Institute for Fiscal Studies.
Lloyds Bank (2013) Halifax House Price Index Sept 2013, October, London: Lloyds Bank.
NIESR (2013) Monthly Estimates of GDP, 6 Sept. 2013, London: National Institute of Economic and Social Research
ONS (2013) Consumer Trends Q1 2013, London: Office for National Statistics.
ONS (2013) Retail Sales, August 2013. London: Office for National Statistics.
Portes, J. and Holland, D. (2012) Self Defeating Austerity, no. 221, October, London: National Institute Economic Research.