Sunday, October 23, 2016
Stormier weather ahead for a nation of shoppers
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

For Britain’s retailers – at least those who are not threatened with having their knighthood taken away – this should be a time of celebration. The latest official figures show that the volume of retail sales in the three months to September was 5.4% up on a year earlier.

That was mighty strong. You have to go back to early 2015 for anything stronger. A jump in retail sales in July, the month after the referendum, was followed by a flat August and September. Even so, it is hard to see anything resembling consumer retrenchment in these figures.

So why the long faces? Some of the strength of sales was because, perhaps because of all those staycations, we bought more petrol and diesel. Even excluding those, however, retail sales volumes were up 5.1% in the third quarter.

Some retailers have always had difficulty reconciling their own experience with the official figures but they can agree on one message from the numbers. This is that they have to work hard, though discounting and special sales events, to achieve their sales.

In more normal times – times of higher inflation than in recent years – the growth in sales values always exceed that of volumes, Two things drove shop takings; the number of goods sold and the price, usually rising, at which they were sold. That, however, is not the case now. While volumes of retail sales (excluding fuel) were up by 5.1% in their third quarter, values – which are what we really count – were up only 3.4%.

The bigger worry is what comes next. Last week brought news of a bigger rise in inflation than expected. True, consumer price inflation only rose from 0.6% to 1% (inflation on the old retail prices index is 2%) but pretty well everybody thinks this is the beginning of a long climb. The median expectation among forecasters is of a rise in inflation of 2.5% next year, with the gloomiest expecting something closer to 4%. Last year, when we had no inflation at all, on the consumer price index measure, looks to have been a one-off.

These days, of course, it does not take much of a rise in inflation to overtake the growth in wages, leading to a fall in real incomes. Both including and excluding bonuses, average earnings are currently rising by 2.3% a year, which is where forecasters expect them to stay. Will they? Won’t employees seeking compensation for rising prices?

In the past they would, whether represented by trade unions or not, but this mechanism appears to have changed, as has the old Phillips curve trade-off between unemployment and wage inflation. We have low unemployment by modern standards but weak wages. These days, 2% is something like the norm for wage increases.

The EEF, the engineering employers’ federation, which represents Britain’s manufacturers, finds that the most common pay rise among its members is “up to” 2% and that a growing number of businesses have imposed pay freezes this year, which it ascribes to greater uncertainty.

Pay is not the only potential source of a squeeze on real incomes. One of the decisions for the chancellor in his November 23 autumn statement in whether to persist with the freeze to 2020 on working-age benefits and tax credits bequeathed to him by George Osborne. This freeze, which will hit many of Theresa May’s “just managing” families, will cost the average household in receipt of benefits and credits £360 a year by 2020 according to new calculations by the Institute for Fiscal Studies. Excluding those families which only receive child benefit, the cost rises to £470. Just managing will become more difficult.

When it comes to consumer demand, real income growth is important, but so is growth in employment. A rising number of people in work can keep spending going even when individual real incomes are being squeezed. That, indeed, was what happened in much of the last parliament. And, on the face of it, it is continuing. Employment rose by 106,000 in the June-August period, new figures show, and was a very strong 560,000 up on a year earlier.

There were, however, one or two signs in the figures of a softening in job growth, even apart from the small rise in unemployment the figures also showed. So the latest quarterly rise was dominated by an increase in part-time employment.

Over the past year less than a quarter of the rise in employment has been in traditional full-time employee jobs; the increase has been mainly due to self-employment and part-time employee jobs. There is nothing wrong with those, though research last week by the Resolution Foundation showed that the typical earnings of the self-employed are lower in real terms than they were 20 years ago. Business surveys suggest, meanwhile, that firms are becoming more cautious about recruitment.

If the outlook for real wages and employment has deteriorated, could the retail sector, and the economy in general, be saved by borrowing. Will households ease the pain, and maintain their spending, by running up more debt? It is happening now. Consumer credit, according to Bank of England figures, is up by 10.3% on a year ago, its fastest rate of increase since 2005.

In the years after the crisis, households ran down their borrowings. Now they are running them back up again, to the concern of some. While ultra low interest rates are a powerful incitement to borrow, debt-driven consumer spending is probably not the way we should be going.

Fortunately, if not for the consumer spending outlook, we may not be. Household debt, particularly consumer credit, is not an alternative to growth in real incomes; it is more usually an accompaniment. People borrow when they are feeling confident about their jobs, incomes and prospects. The strong growth in consumer credit over the past couple of years has accompanied good growth in real wages, not been a substitute for it.

Nor, I would suggest, can one of the saving factors of this summer – shopping tourists, or tourist shoppers taking advantage of the pound’s fall to buy goods in Britain – be expected to be more than a passing phase. Given that many of the things they have been flocking to buy are imported, the price advantage will soon be self-correcting, because new stock will be cost more to import as a result of the pound’s fall. Again, you cannot build Britain’s economy on selling Swiss watches to tourists.

None of this means consumer spending is about to collapse. The environment will, however, get tougher. Forecasters expect consumer spending to grow by just over 1% next year, its weakest since 2011, when households were hit by a combination of a Vat hike and rising oil prices. Consumers will struggle to beat this renewed squeeze.