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Are we entering a period of austerity retail?

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The economy is incredibly hard to read at present but an increasingly consistent trend emerging across the UK is falling high street retail sales.

Almost every retailer that is primarily based in bricks and mortar has seen a trading drop-off during this year, but is this decline a small blip or the start of a long period of austerity retail?

Consumers are certainly feeling the pinch. High inflation, stalling wage increases and rising unemployment are making it increasingly difficult for consumers to justify splashing out on a new Lipsy dress or Blu-Ray DVD player.

To add to their problems the coalition government is currently attempting to cut the national deficit at a considerable speed, and this means significant spending cuts.

A one per cent rise in National Insurance Contributions, five per cent increase in the rate of stamp duty on properties worth over £1 million, the restriction of pension tax relief and a freeze on the inheritance tax threshold will all affect households.

The most significant change announced by Chancellor George Osborne in his recent Budget speech however, is the change from indexing benefits by the retail price index (RPI), which includes mortgages and household costs, to the consumer price index (CPI) which does not.

Capital Economics estimates that this switch from RPI to CPI will cost households £1.5 billion this year, while changes to tax credits will cost a further £0.3 billion.

Vicky Redwood, Senior UK Economist at Capital Economics, said: “We think that real household disposable incomes will fall by two per cent this year and just stagnate next year.

“Obviously this is a big hit to households’ spending power. Part of this is due to inflationary forces outside of the government’s control.

“That said one of the factors pushing up inflation is of course the VAT rise. What’s more, incomes are also being hit by rising taxes and benefit cuts.”

To suggest that the retail industry is against the bulk of the government’s measures is incorrect however, and most independent commentators would agree that the cuts need to be made to reinvigorate the economy and inspire growth.

The British Retail Consortium (BRC) has just reported the biggest fall in retail sales for 16 years during March and while they see that austerity measures are affecting the industry, they still “fully support” the government’s cuts to public spending.

Richard Dodd, Head of Media Campaigns for the BRC, said: “The cuts and prospect of cuts is one of the main factors seriously undermining trading, as shown in the latest retail sales figures.”

Instead of criticising the cuts programme however, the BRC is more concerned that the Bank of England keeps interest rates at their historic low of 0.5 per cent, thus protecting families from further financial pressures.

“We do not want to see an interest rate rise in May as it will not address the main causes of inflation, global commodity prices, but will certainly further curb consumer spending,” Dodd added.

In truth there is little the government can do to help consumer finances and Capital Economics estimates that the latest wave of fiscal consolidation, which came in at the start of April, only accounts for 0.25 per cent being taken off consumer finances.

Rising commodity prices, the main pressure on inflation, are international and made worse by events out of UK control such as natural disasters and the conflicts in the Middle East.

Just in the last month, John Lewis, Dunelm Group, WHSmith, Gap, Halfords, Carpetright, Mothercare and Best Buy have all seen sales fall in the UK and Dixons, HMV and Clinton Cards are among the companies to post profits warnings.

Even if the economy starts to pick up in the second quarter, as many predict it will, there is no guarantee that retail sales will follow suit.

Director of Retail Research at market research group Mintel Richard Perks admits that it is presently difficult to read the markets but expects the retail industry to have a much slower recover then the rest of the economy.

“During 2008/09 families cut back on everything but retail, with people unwilling to give up the standard of living they had been accustomed to,” Perks said.

“Consumers are largely de-coupled from the larger economy however. Retail did well during the recession and I suspect will suffer as the economy starts to recover. All the spending of the last few years will now have to be paid for.”

Retailers are aware of the dangers and the good ones are adapting to suit the new environment, putting value and cost-cutting and the heart of strategy.

Lord Wolfson boosted his reputation even further in the last six months by firstly being the first major CEO in the sector to predict the bad times and by secondly maintaining profits by efficient costs control.

Dodd said: “We are setting no timescale for retail sales to recover. The retail sales figures were worse in many ways then during the recession and when the country emerged from recession we expected a gradual if slow improvement.

“For retailers it is all about running an efficient business with value the most important principle for the industry, not just in terms of price but also quality.”

Some are doing very well within retail, notably e-tailers and youth brands such as Asos.com, but the traditional landscape of the business is shifting.

This is likely to only be the beginning of a prolonged period of low retail sales and with so much changing within the industry, not least in multichannel development and the decline of the high street, the sector is going to dramatically change before it returns to pre-recession trading levels.

Published on Wednesday 20 April by Editorial Assistant

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