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Uncharted waters

By: Jeff James

Listed Under: Top Story

Published: Monday, June 07, 2010

It’s all change in Britain with a new coalition government, but will this uncertainty have an effect on an already shaky economy?

The recent election results only confirmed what most people already probably knew. After 13-odd years in the hot seat, Labour was out of power, with a coalition government of the Conservatives and the Liberal Democrats in its place.

With that in mind, big changes are afoot. And whoever won the election was always going to face a baptism of fire, given the state of the economy. Some drastic plans have been mooted, and with an emergency Budget being delivered on June 22, this could affect the state of the economy - and retail businesses - further.

Just when it looked as if there were signs of recovery, the recent revelations of overspending and overwhelming debt put paid to any chances of a turnaround. Not only that, but there have been rumours of certain methods of reducing the debt levels in the country, not all of which are entirely welcome by retailers.

VAT INCREASE
For example, high street bosses are convinced that Chancellor George Osborne will use the emergency Budget as an opportunity to announce tax hikes and a VAT increase, which could be as high as 20 per cent. Even if the VAT increase doesn’t happen immediately, many top economists are predicting this will be put into practice by 2011.

That said, recent figures for trade have not been too encouraging. Easter 2010 was a particularly turbulent time, according to the British Retail Consortium (BRC). Its figures showed that UK retail sales values fell 2.3 per cent on a like-for-like basis from April 2009.
The poor figures were said to be a result of not only an early Easter, but the uncertainty over the looming election results and consumer caution in general.

Over at Capital Economics, a similarly dismal picture was painted. The company’s Jonathan Loynes said that the overall picture is still one of pretty sluggish spending growth. “With debt-laden households being squeezed by falling real wages, and a major fiscal tightening on the way – probably including a further rise in VAT – the outlook for consumers, and hence retailers, remains far from rosy.”

So what is going to happen? Chancellor Osborne has outlined plans for £6.2billion in spending cuts, saying "urgent action" was necessary to address the budget deficit. He also said there would be a civil service recruitment freeze, as well as cuts to IT programmes, property and quangos. And there has been constant mention of the aforementioned VAT increase, which could have a significant effect on retail trade.

Mike Thornhill of sports retailer Millet Sports/ActivInstinct says that the focus on reducing the deficit is not necessarily a good thing for retailers. “The mooted VAT rise will naturally have an impact on consumers’ spending decisions, particularly for big ticket items,” he says. “However, if the rate increases to 20 per cent then I would expect to see similar behaviour to the rise to 17.5 per cent from 15 per cent, where there was an initial rush to make purchases followed by a drop off for a few weeks until demand picked up again.”

Thornhill adds that an increase in VAT to 20 per cent may not have a significant impact on retailers. “An extra 2.5 per cent on most items isn’t a big increase,” he says. “However, if the government look to increase much more than this, then I think this would be much more of an impact psychologically and affect spending decisions much more.”

A far bigger concern, according to Thornhill, is consumer confidence, which he says is likely to have a much bigger impact on retailers than a VAT rise. And the problem with consumer confidence is that it’s far more difficult to predict. “If there are lots of cuts, lots of job losses in the public sector and the perception that front line services could be affected, then this would be likely to make consumers uneasy and postpone buying decisions,” he explains.

CAUTIOUSLY OPTIMISTIC
Despite Thornhill’s reservations, he is still cautiously optimistic about the future of the economy. “I think the economy has improved hugely over the last 12 months and the non-public sector has worked hard to pay down debt, strengthen balance sheets and improve profitability, which has been a big part of the recent growth,” he says.

“However, a big reduction in public spending is likely to have an impact on the economy, but I think this will slow recent growth rather than tip us back into recession.”

Thornhill says the previous government did a lot to support retail from the start of their tenure. “They ensured that the economy was growing, inflation low, employment high and access to credit was improved for consumers,” he says. “You have to remember that it wasn’t all that long ago that a big proportion of the population didn’t have good access to credit and often their main access to a wide variety of consumer goods was serviced by the old mail order catalogues.”

Looking back to the start of the recession, Thornhill adds that the government again tried to support consumption and industry (including retail) by lowering VAT and working with the Bank of England to lower interest rates and initiate quantitative easing to help keep the economy.

He says: “This helped both retailers and consumers, the latter often finding they had more disposable income in real terms due to lower mortgage payments, and has helped to restore some growth, which we will hopefully be able to build on going forward.”

If 2010 has any cause for concern for retailers, then the following year, at least, should show some improvement. Advances in technology could prove to be a benefit, as Thornhill explains: “Our business is mostly online now, which continues to be the growth area for retail, and I expect that to continue at a rapid pace over the next few years.”

Thornhill also claims the 2012 Olympics will provide that all-important feel-good factor, saying that, regardless of whether companies sell sports equipment or not, businesses should receive a big boost in
two years time.

Jack Gordon of Silver Hammer, a marketing and public relations company that regularly works with sports brands, including the likes of New Balance and Intersport, takes a more cautious view of the economy’s prospects.

He says the outcome of the election could almost be divided into two: “The unnerving spectre of a hung parliament, which soon moved us further into unknown territory with the prospect of the first coalition government since the war,” he says.

“We are in uncharted waters and that can adversely effect the economic landscape. One of the first casualties seems to be the housing market, where hopes of a spring recovery have been dashed with the knock on effect to undermine consumer confidence.

“The global economy is bigger and more powerful than sovereign governments, although each country's fiscal policy does have an effect domestically. The legacy the retail market is still reeling from stems directly from the financial crash. The drop in property prices, the public sector squeeze, a depression in the jobs market, frozen wages, greater underemployment and the possibility of an increase in interest rates later to snuff out any latent inflation all adds up to a further dousing of consumer sentiment.”

SHORT TERM
Looking at the short-term future for UK retail, Gordon doesn’t think an increase in VAT will help the high street. “It will be another millstone around the industry's neck, depressing sales and denting public confidence in the longer term after a possible spurt to get in before the rise.

“The sector's future is inextricably linked to the government's economic policy, which is to concentrate its efforts on the deficit reduction programme. We are moving from an era of plenty to an era of belt-tightening, whether this agony will be mitigated by the ecstasy of hosting major global sporting events remains to be seen.”

Will the World Cup offer a ray of hope for the UK economy? Recent statistics have shown this indeed could be the case. It’s been said the 2010 World Cup could boost UK retail sales by an estimated £987million if England survive the second round of the tournament. This figure could increase to £2.01billion if they make it to the final. Spending in June and July could grow from £50.14billion to £52.15billion - a four per cent rise.

The figures also show that online spending is expected to hit £116million by the end of stage two of the tournament, rising to £205million if England reach the finals - representing 10.2 per cent of total World Cup retail spending.

The findings are based on analysis of the impact of the 2006 World Cup, trade estimates, and past research reports.

Bruce Fair, managing director of Kelkoo, the shopping comparison website that commissioned the survey, says: “The World Cup is the largest sporting event in the world, second only to the Olympic Games. As a result of its mass appeal and viewership figures, it has natural implications for consumer spending and retail businesses.

“The last final was viewed by 715million people worldwide and it is estimated that the 2006 World Cup increased UK retail sales by £1.25billion.

“In addition, experts argue that success in the World Cup affects more than a country's retail and leisure sales; it can also increase the country's rate of economic growth, have a positive impact on consumer confidence, and ultimately winning the World Cup could result in 0.7 per cent GDP growth.”

Fair concludes that the World Cup is not just a lucrative event for pubs and bars - online and high street retailers will also reap the rewards. “The event will provide a welcome boost to retailers, with the UK's passion for football prompting a rapid rise in spectator and sports-related purchases,” he says.

“England's progress through the tournament is therefore likely to reinvigorate sales in the retail sector, stimulate consumer confidence and ultimately drive economic growth."

Could this be the shot in the arm sports retailers have been hoping for? Possibly, although with the state of the economy fresh in so many people’s and companies’ minds, England’s performance would have to be outstanding in order to make a major difference.

With the huge level of debt amassed, and the drastic steps needed to reduce the deficit, the World Cup is still a comparative drop in the ocean. Still, if England progress to the latter stages of the tournament – or even win it - then it would be the first step on the road to recovery. Fingers crossed.

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