Hann-Ju Ho 

    Retail sector insight

    Author: Hann-Ju Ho, Senior Economist
    Publication date: 01.04.2010

    Recession always hits consumer spending hard - and this downturn has been no exception. But there are signs that some elements of the retail mix are holding up, despite severe pressure on wallets. But that said, the next 12 months, with the pressures set to increase, will remain rocky.

    UK distribution output contracted more than 4% in 2009, according to the ONS. Within that, the volume of retail sales proved to be resilient, rising about 1.75%, helped by low interest rates and low inflation (including the VAT cut) which boosted real spending power. Internet spending as a share of total sales also continued to rise.

    Looking at retail on the high street, volume growth last year was supported by lower food price inflation and significant discounting in non-food sectors, including the VAT cut, as well as the one-off boost to household incomes from lower interest rates. But bad weather took its toll, along with the end of the VAT break, which weighed heavily on retail sales.

    Retail Sector Insight graph 

    Looking ahead, the twin factors of public spending cuts and continued unemployment means that retail sales will remain sluggish for the remainder of the year. Post-election fears of redundancies and large cuts mean that for many the rest of 2010 will be characterised by prudence and continued saving. Interest rates increases may also add to that impact, as well as the fear of higher taxes.

    Bright spots remain, however. The weak pound has made the UK a more attractive destination for visitors. London, in particular, felt the benefit of this over the past six months (though with the corollary that margins were squeezed by rising import costs). The scope for price rises is limited, so the focus on cost control will continue as consumer spending power remains weak.

    And what of the motor trade? There's no doubt this sector has suffered enormously since 2007. High-profile troubles have plagued car makers and that has filtered down to the forecourt. Output in motor trades fell about 8.5% last year, though activity actually improved in the second half following the introduction of the scrappage scheme, particularly for sales of 'greener' vehicles.

    The scrappage scheme, however, expired at the end of March and VAT has returned to 17.5%. It remains to be seen to what extent car sales will hold up in the remainder of this year.

    The CBI survey suggests that motor trade activity will ease, given significant headwinds facing the consumer, not least the fragility of the labour market. New car dealers have faced rising import prices, resulting from the weaker pound. This may limit the capacity to lower prices to support volume growth. Indeed, new car price inflation is picking up.

    Used car price inflation has accelerated to 19%, according to latest CPI figures. This may partly reflect the impact of the scrappage scheme, which has taken off the road many cars which otherwise would have been sold on.

    Of course, these figures give only a local picture. Where the UK sits within the global context actually gives heart to many in the sector. It appears that the volatility in UK distribution output has been far more marked in the UK. While the dips were deeper here - 2009 saw a fall of 4.4% in annual growth, worse than all of the US, Germany, France and Spain, 2011 may actually see the UK rebound in quite marked fashion. We predict annual growth of distribution output of 2.5% next year, a greater rate than all bar the US.

    Source: This article was first published in Lloyds Banking Group - Perspective Magazine Edition 1.

2/25/2018 5:30:12 PM