Comment: The future of the high street

Bill Jamieson
Bill Jamieson
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FEW ready reckoners on our economic wellbeing are more closely followed than high-street shopping.

We often judge the big picture of the economy watching what others are doing in shops, supermarkets, café bars and restaurants.

Such anecdotal evidence is capricious, selective and subjective. If Sainsbury’s has a quiet afternoon, we’re quick to take this as evidence of an economy in the grip of austerity. When John Lewis is busier than usual, we wonder where all the money is coming from and say austerity is barely biting.

All this matters because, however much policymakers urge a recovery based on manufacturing and exports rather than consumer spending, the high street will be a key indicator as to whether the economy can sustain and build on its recent improvement.

So we turn to the professional economists for guidance. They’ll know. They’re the boffins. They have detailed and precise statistical data and models. So what’s their view of consumer spending prospects?

They are split right down the middle. The Ernst & Young Item Club report last week on what lies ahead on the high streets could hardly have been more upbeat. Consumers, it said, are set to “loosen their belts”. After years of gloom and retrenchment, households have grown weary of austerity. They want some retail therapy. And they are in a mood to take it.

The group predicts a recovery in consumer confidence. It forecasts that consumer spending is set to grow by 1.2 per cent this year before rising to 1.9 per cent in 2014. And it says spending growth will reach 2.2 per cent by 2015 – taking it back to the level it was before the financial crisis.

Peter Spencer, chief economic adviser to the E&Y Item Club, said the UK “has essentially returned to relying on the consumer to drive economic growth”. Spending on entertainment and leisure is expected to grow by 5.9 per cent this year, as shoppers splash out on TVs, tablet computers, smartphones and package holidays.

But where’s the money coming from?

Increases in personal tax allowances will see basic rate taxpayers taking home nearly £300 extra this year. Spencer also notes that mortgage lenders, estate agents and property websites are reporting an increase in activity, some of which has been helped by the government’s Funding for Lending Scheme.

But it comes with a caveat: such spending can “snap back” at the first sign of bad economic news. This could send us scuttling back to cheap meals at home and nights spent on the sofa.

However, Mr Spencer, it seems, has only been walking down the sunny side of the street. There’s another, quite different view, just out from the equally respected Centre for Economics and Business Research (CEBR). In fact, it’s exactly the opposite.

It warns that consumer spending will grow at a snail’s pace for six more years as households save more. In the boom years – 2002 to 2007 – consumers were happy to spend and borrow freely. Unsecured lending jumped from £150 billion to £193bn alongside large increases in secured borrowing. And the savings ratio dropped from 5.1 per cent to 1.7 per cent as households saved less of their income to fund the extra consumption.

But, since 2007, real consumption has plummeted as the financial and Eurozone crises tore through the economy. The free flow of credit dried to a trickle. Consumers tightened their belts as real incomes declined and unemployment rose. This has pushed the savings ratio back up to 6.9 per cent – over three times the rate in 2008 – bringing sharp falls in consumption.

The think-tank now forecasts real consumer spending per household will rise, on average, by less than 0.4 per cent a year between now and 2018 – a lacklustre pace. And it expects the savings ratio will hold steady at 7 per cent until 2018 at the earliest. Consumers are saving more to guard against the post-crisis threats of slow wage growth and unemployment as tight credit conditions also militate against borrowing.

Daniel Solomon, CEBR economist and main author of the report, says: “Consumption is expected to grow at a snail’s pace over the next six years, meaning the British consumer cannot be relied upon to pull the economy up by its bootstraps. Retailers won’t be opening the champagne just yet.”

Official figures on retail sales for May are due out on Thursday. These are expected to show a rise of 0.6 per cent month-on-month after falling by 1.3 per cent in April. This would still leave the figure down on a year-on-year comparison.

Rotten weather – the near-constant rain last summer and freezing temperatures this year which extended well into April – discouraged shoppers from venturing out and played havoc with clothes sales. The summer frocks stayed on the shelves last year while spring lines this year barely had a chance. Restaurants, garden centres and destination shops were also badly hit.

Earlier this month the British Retail Consortium reported that total retail sales values rose 3.4 per cent year-on-year. This followed a fall in April, the first decline for almost a year.

However, sales in March and April were distorted by Easter occurring earlier in 2013. In Scotland, the retail picture has been notably less buoyant.

Global Insight economist Howard Archer says there are certainly some positives for consumer spending and it is encouraging that consumer confidence rose markedly in May to its equal highest for two years. In particular, employment rose to a new record high in the three months to April. In addition, low and recently reduced mortgage interest rates freed up extra money for spending.

A modestly improving housing market should also help. And April’s dip in inflation to 2.4 per cent and the recent sharp retreat in oil and commodity prices suggest that inflation is likely to peak close to 3 per cent this summer – rather lower than previously feared – and it should start to fall back from the autumn.

“However, the upside for consumer spending will remain limited,” he adds. “Underlying earnings growth remains very low, and at 1.3 per cent in April was still over a percentage point below the inflation rate of 2.4 per cent.

“Tighter fiscal policy is also affecting many families, while debt levels are still high despite significant progress in deleveraging – household debt was still 140 per cent of household income in the fourth quarter of 2012, although it has fallen from a peak of almost 170 per cent in 2008.

“It is also notable that consumer confidence is still at a historically low level despite May’s improvement.”

My own view is that while there are increasing signs of recovery, there is little likelihood of growth accelerating much above 1.5 per cent – with even less likelihood of an uplift in earnings. Stock markets are jittery about the prospect of an end to quantitative easing. And next year households will be anxiously watching for signs of rising interest rates: the biggest deterrent to further borrowing. That should put the damper on any return of a consumer “boom”. So, even though it’s brighter on the sunny side of the street, thunderclouds can still threaten.

Twitter: @Bill_Jamieson