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The Retail Forecast for 2013-2014
From the Centre for Retail Research
"Life is a Top which Whipping Sorrow Driveth"
(Fulke Greville, Lord Brooke, 1554-1628)
[As at 18 January 2013]
The Forecast
Our forecast for 2013 is for retail growth of only 0.3% in real terms and (subject to no further upsets such as a major Eurozone crisis) 1.2%-1.4% in 2014. In practical terms the 2013 forecast is 'flat', and in terms of its final outcome it may vary between zero and 0.5%. The figure includes online sales. Please note that the retail forecasts and commentaries of some other groups relate only to physical shops and stores; online spending estimates seem to be an afterthought, whilst we naturally include online sales as part of total retail. Note also that estimates of inflation can also vary widely depending on whether one is using CPI, RPI or RPIJ: they are all different.
The forecast implies that 2013 will seem much like 2012, but ever so slightly easier. However sales on the high street through physical retail stores will continue to decline, because online retailers will gobble up all the retail growth available. Total sales in UK shops and stores will fall again in 2013 for the fourth year in succession, this time by -1.9%.
The forecast of 0.3% growth is made in volume terms (ie with inflation subtracted). However because our estimate of retail growth is low, this means that our forecast in financial terms has to be mainly a forecast of inflation. Inflation forecasts are pretty hard to get right (ask the Bank of England). Our estimate in financial terms is retail growth of 2.83% for all retail 2013.
Food and Non-food: we expect food sales growth of 3.2% and non-food sales growth of 2.26%. Food sales growth will mostly be inflation. In non-food, clothing and footwear sales are expected to fall in volume terms (-1.1%), DIY, furniture and homewares in 2013 will continue to be affected by the weak housing market (-1.5%), pharmacy should do quite well (+0.6%), electronics and comms will continue to be driven by smaller devices (+1.2%), and music, books, entertainment, and leisure will fall by 0.5%.
Price rises and Food. Twelve-month RPI inflation fell from an average 5.2% in November 2011 to 3.4% by November 2012 (the most recent data available when this forecast was prepared). Food prices are currently the main inflationary factor recognised by ONS. Moreover several retailers have warned that food prices will rise significantly in 2013 as a result of last-year's supply problems, hot weather in the US and poor growing conditions (mostly rain) in the UK. We think that this effect is overstated, but our view is that (a) the price increases now 'in the system' will certainly feed through to increased retail food prices in the first part of 2013, but (b) we think that new supply factors in 2013 will have only a modest overall impact on prices. So we certainly see food price inflation in the first half of 2013 but this should relax later in the year.
The Background
The retail sector has been hit by three main problems since 2008:
- The recession has sapped consumer confidence and reduced borrowing. Consumers spend less.
- Retail balance sheets and the rents retailers pay were historically focused on continued growth and reckless consumer spending. Because consumers have curbed their spending, the economics of current-day retailing no longer work.
- The rapid growth on online spending, which now accounts for more than 12% of retail sales, has occurred mainly at the expense of conventional shops, supermarkets and department stores, resulting in even lower spending in physical retail stores.
2012 proved to be the worst year for bankruptcies and failures since the start of the recession in 2008 and we certainly predicted that. Fifty-four significant retailers went into administration last year (2012), including Peacocks, Comet, Clintons and JJB Sports, affecting 3,951 stores and 48,000 employees and by 17th of January 2013, another four retail failures were responsible for 991 stores closing and 10,700 redundancies. Further detail can be seen in our webpage Who's Gone Bust?
The Centre's Forecasts for 2012
Our original estimate for 2012 of (a) low retail growth in the first half and (b) faster growth in the second half was correct in principle. But the massively negative growth in the first half (the so-called 'double dip' recession) meant that the overall result for 2012 was probably only +0.7% in real terms, compared to our forecast of +0.9% (deducting inflation). These retail estimates include online retail sales. The ONS published date (18 Jan 2013, Table 3) shows real volume growth in 2012 of 1.4%, which seems to us on the high side (but this estimate may be revised later).
Although the OBR's forecast for 2013 is 1.2% growth in GDP (one of its original forecasts for 2013 was growth of 2.3% [as viewed from Nov 2011]), the OBR is almost always wrong. We have pitched our own estimate on the low side (+0.3%-0.5%) on the basis that several threatening external factors not only might go wrong but will go wrong (see next paragraph) and that the UK government will continue with inappropriate policies not aimed at creating a more robust economy.
We expect 2013 to be a better year than 2012, but it is hard to be more than slightly optimistic in view of the possible dangers from: continued UK austerity, another Eurozone crisis, slackening growth in China and India, and US economic policy. Experience has shown us that: UK consumers are very very reluctant to spend, but the coalition is now focusing on the maintenance of low interest rates as its measure of effectiveness (really!); the Europeans will inevitably create another Eurozone crisis by making impossible demands, and then giving in at the last moment; and the American political system seems to lack the political resolve to make macroeconomic decisions except by a crisis. Our economic problems are thus made more intractable by the political failures of ourselves and our implacable allies.
Several Things Have Gone Wrong for the UK Economy
A. The Bounceback from Recession that has not occurred
This chart shows how quickly the UK economy normally bounces 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 flat after the 30 months point (the black line that is now horizontal).
THE UK BOUNCEBACK FROM MAJOR RECESSIONS 1920S TO 2000S
[source: NIESR]
B. UK Post-Recession Growth Worse Than Neighbours
Although low-growth in 'Europe' is often given as the cause of the UK's current economic weakness, our major trading partners apart from Italy came out of the recession much earlier and have grown much more quickly. A key difference has been that the fall in UK consumer spending has reduced GDP by 3% compared to a rise of +0.5% in the rest of the G7.
C. Low Consumer Confidence
The GfK Consumer Confidence Survey shows that although confidence is less bad than in December 2011 it is still terrible. Confidence estimates these days depend on tracking negativity. Confidence worsened significantly in December 2012 following the Chancellor's Autumn statement when he forecast that austerity would continue until 2018.
D. Consumer Spending Flat since 2009
Consumer spending fell from a peak in the final quarter of 2007 and has been flat since 2009,Q2. The blue curve, which looks pretty good, is rising only because of price rises. The red graph tracks spending in real (volume terms) and that has been going nowhere for 24 months.
E. Households Have been Paying off Borrowings
Much of the growth in household spending pre-2008 was financed by borrowings and house re-mortgages. Since 2008, consumers have been reducing credit card debt, loans and the amount outstanding on mortgages. Since early 2008, households have repaid £137.5 bn of mortgage debt.
If they are paying off debt, then they are not spending in shops and this is likely to continue until households feel that the new debt ratios (to their net income) are satisfactory, which may be around 2015 or 2016.
F. The Austerity Conundrum
In theory, if a Government runs a tough no-nonsense economic policy, then although people affected with feel very upset, at least this will put the public finances in order. This has certainly happened in Ireland. The 'Austerity Conundrum' in the UK is that austerity is neither cutting our debts nor providing economic growth, although the deficit is reducing slowly.
If a country wishing to reduce its deficit puts up taxes, this will reduce consumer spending somewhat but the main impact will be on reducing the size of the deficit. That is the theory of Government fiscal and monetary policy. It must depend on estimates of the multiplier (earlier estimates in the 1980s and 1990s were quite low); what else is going on in the economy; and whether resources can shift into exports and produce economic growth in that way.
Why has it gone wrong? The IMF now argues that in the new recessionary world, increases in tax often reduce GDP by an amount more than the tax: so if taxes rise the deficit gets larger. The NIESR published a paper in November 2012 arguing that only Ireland is benefiting from austerity and for other countries tax increases such the VAT imposed in the UK in 2011 simply make things worse. In the UK (unlike Ireland) resources have not moved quickly into the exporting sector and international demand is weak (whilst Ireland can export foodstuff to the UK, Europe and now to China).
The IMF estimated also that cuts in public capital expenditure, such as roads and public housing, were estimated to have an even greater effect on GDP. Both the coalition and the Labour governments have cut public capital expenditure and that may have reduced demand may a greater amount that the money saved.
Low growth itself (whether or not created by austere policies) creates further problems for the national economy, because tax receipts decline but public spending will only fall a little, thus driving up public debt even though the deficit falls somewhat. The OECD estimates that in the UK the general government gross debt has risen from 85.6% of UK GDP in 2010 to 105.3% in 2012 and should peak at 113.9% in 2014. The deficit itself is expected to fall from -8.3% of GDP in 2011 to -6.0% in 2014, but the National Debt will rise (according to the IMF) because the non-existent growth reduces tax receipts without reducing government spending.
In the new world, therefore, austerity can be self-defeating. It would be nice, I suppose, to reduce the National Debt even though current policies are pushing it up. When I was a baby our National Debt was 217% above our total GDP, far higher than it is today, yet the world as we know it did not come to an end. By 1962 National Debt as a proportion of GDP had been halved. Ministers of the Crown have expressed the view that a failure to reduce the National Debt will put additional burdens on generations yet to come. Three points: this is not really a moral issue, but one of the public finance; we are still paying interest on the money raised to fight the battle of Waterloo and this does not really matter as long as we can continue to finance it; and thirdly, if by being sanguine about the National Debt we pass a much stronger economy for our successors to inherit, this gives them additional resources to pay off the Debt if they so wish. It was after all economic growth that halved the National Debt ratio after the Second World War.
G. Has the Economy Become Zombie-like?
In late 2012/early 2013 one of the main debates amongst the commentariat concerned whether the fall in recent UK labour productivity was evidence of a strategic problem in the UK. The strategic problem was whether the recessionary changes caused the economy meant that the economy had been permanently weakened. In that case, even if a benevolent government created additional demand the economy might be too weak and inefficient to grow as quickly as before. Employment, particularly part-timers and self-employed, has risen even as the economy weakened, hence output per head (or, more strictly, growth in output per head) is declining.
The argument is whether the decline in productivity is 'just a phase we are going through' or whether UK Limited has lost part of its competitive and strategic strengths, meaning that in future we will only be able to grow by say 1.0%-1.5% instead of 2.5%. If this is true then today's woeful retail performance may be as good as will be possible for the next five or ten years.
First, on a personal note I spent ten years studying labour productivity in retailing and the whole question is a lot more complicated than it seems to be. Economists and people like the ONS are not necessarily valuing outputs correctly or labour and capital inputs; productivity has slowed in the recession also because companies and the public sector have cut investment on new projects, preventing many highly-productive assets coming into existence. The structural changes made in finance (previously the UK's biggest industry), retail (the UK's second biggest industry), manufacturing and the public sector have involved scrapping assets and people but what is left is not necessarily highly productive either. We are also going through a major IT change which may not increase productivity at present, but is expected to do so in the future. So there may be other reasons apart from a permanent weakening of the UK economy why labour productivity is falling.
The zombie problem is held to be: that too many UK enterprises are only marginally profitable and are kept in existence because banks do not want to destroy them, hence preventing their labour and capital resources from being used more productively. In addition, many small and medium enterprises denied funding or support, cannot invest and make full use of their assets and are being held back because financial institutions have low expectations in a zero-growth economy.
The growth of price-competition may also mean that intermediate goods are not being valued properly by ONS statistics. Part-timers and the self-employed may mostly be trying to simply get some income by doing something rather than working in highly-productive ways and underproductive jobs may be the only ones currently available. Whilst sluggish growth and years of low investment mean that more productive businesses fail to expand because the markets are not there.
We feel that there is some evidence that the structure of the UK economy has become damaged (as well as consumer confidence) so it will not be easy to return to our previous growth path. In other words, economic success is not simply a matter of increased levels of demand and consumer confidence.
References
GFKNOP (2012) 'December Sees UK's Consumer Confidence Decrease ', found at http://www.gfknop.com/pressinfo/releases/singlearticles/010716/index.en.html
House of Commons (2012) Economic Indicators update: 21 December 2012, London: Palace of Westminster.
IMF (2012) World Economic Outlook, New York: International Monetary Fund
ONS (2012) Consumer Trends, Q3 2012: Statistical Bulletin, December, London: Office for National Statistics.
ONS (2012) Retail Sales, Summary, November 2012, December, London: Office for National Statistics.
Portes, J. and Holland, D. (2012) Self Defeating Austerity, no. 221, October, London: National Institute Economic Review,
