Whatever political leanings one has, the last ten days or so have hopefully provided a nadir in political (mis-)management of the economy and society. The crashing of the pound, the almost demise of the pension market, a screeching u-turn on the smallest (though symbolic) part of the plan (“special fiscal event”) and the sense of a government and a national bank pulling in opposite directions should tell people enough is enough. Are we pumping money into the economy (government) or trying to control consumer spending (bank)?
Some of this is clearly not of this government’s making, but a lot of it is, and has been steadily building for a decade and a half or so. Choices made and approaches taken since the Conservatives have been in power have led us to this place, most notably in austerity and its impacts. Brexit was a milestone on the way to some strange utopia and added more problems to the economy at, as it turns out, the worst possible time.
This post is not simply a space to go on about where we are and who are the baddies, but to try to look at the potential retail impact of our predicament. Energy costs are an issue, product prices and inflation are rising, labour costs are increasing but labour is in very short supply, consumers are being more careful, so retailers’ sales are declining and so on. And that was before last week. Even Next felt the need to cut sales and profits forecasts.
I have found the Economics Observatory material to be useful and informative (note: I have written for them on odd occasions). Recently, and very helpfully, they produced a post with a series of charts about the economy and current issues. It is well worth reading and having a play with the timescales on the charts. You can make your own minds up about how long our problems have been gestating and how important the current levels are. They all show, even with the Covid period, the staggering scale of the issues created in the last 10 days (and it is the scale and speed together that are key).
Oh, and that the pound is a roughly a quarter down against the dollar since 23 June 2016.
The economic crises has been long in the making, being accelerated in 2016, and turbo-charged by Covid and now especially last week. Retailing has been changing and often suffering since the financial crash of 2008 and whilst some of this is structural and technologically driven, much has derived from growing consumer weakness even in times of low interest rates and cheap money.
Retailers operate a balancing act between costs and sales. The UK Government has given a 6 month reprieve on energy costs but what happens then? Nothing seems to be on offer on business rates yet, and in that event if the annual multiplier is used next year there could be carnage. Some costs are off their peak (shipping, petrol) but any instability or fall in the pound won’t help.
Consumer demand is patchy. There is money about in some quarters but a clear lack of money, even for basics, in others. As personal costs rise so demand slackens, something already being felt over the long run of austerity and now accelerating further. As prices rise for consumers, so spending on essentials, including energy and food, become paramount and leave nothing over. As interest rates rise so more people get sucked towards a more limited pattern of spending. It is not just those on benefits that are struggling (and they really are) but sections of society well beyond that. This will expand further if mortgage rates continue to increase and/or a fall in house values occurs.
Retailers are thus caught in the maelstrom created by government policy and inaction. They see and feel this generally but especially in the employment market where wage hikes and other initiatives to help employees (or indeed to attract them) abound, but where other retailers are struggling to pay the going rate. For retailing to flourish there needs to be more macro stability and less volatility. If people don’t have money to spend then what can retailers sell? If their own costs are rising and out of their control, then how long can they continue to trade? There are short term things that governments can do to make life easier for retailers, but in the long run, there is a requirement to rethink the distribution of resources and to bring far more people (consumers and retailers) back into feeling positive about their finances and the outlook. Only then can the wider challenges of the sector (and beyond) be faced