Our view

Sep 07 - UK economic outlook: Counting on Christmas cheer and a happy new year?

• By Stewart Robertson, Economist - Norwich Union

Christmas seems to come sooner every year and this year is no different with Christmas cards already on sale in the shops. 

On average 80% of all annual retail profits are made in the last quarter of the year so the early advent of tinsel in stores should come as no surprise. Poor trading over the Christmas period can destroy a retail company's annual earnings statement, while a good performance can make up for weak sales in the rest of the year. 

Recent figures show that retail sales picked up in August this year as the weather improved after a dismal July. However, overall growth was weaker when compared with the same period last year. (See table below.)  Although sales volumes have grown, this has come at a cost as retailers have discounted goods heavily in order to move seasonal stock.  This weakening in growth is probably due in no small part to a drop in consumer confidence; and it seems likely that the recent financial turbulence, along with higher interest rates and a cooling housing-market, will dent consumer confidence further.

In addition the price of the non-discretionary basket (mortgages, food, fuel etc) is rising by about 10%, largely because of much higher mortgage interest payments. (See graph below). Moreover, household incomes are growing more slowly - at only about 4%. These two factors will combine to put a greater squeeze on discretionary spending as we head into 2008. 

The recent and aggressive cut in interest rates by the US Federal Reserve combined with the Bank of England's belated announcement of plans to inject £10bn into the money markets will help calm the money markets, which in turn may soothe current consumer jitters as news coverage of turbulence in financial markets starts to recede. But even the interest rate cut by the US Federal Reserve and the cash injection from the Bank of England will not be sufficient to prevent a slowdown in spending.

Overall, it seems likely that retailers will feel the chill towards late November, early December. Recent research¹ shows that even before the recent turbulence in the money markets, consumers were cautious about committing to big purchases, indicating that retailers will probably have to work very hard to entice us to splurge on those luxuries for Christmas. 

Even if consumers feel they can't justify asking Santa to put something lavish under the tree they may still feel quite entitled to indulge on the little luxuries like food and drink. Either way, we can expect to hear an awful lot of jingle bells as we are encouraged to spread some retail Christmas cheer while we shop over the next few months.

Retail Sales

Source:  BRC-KPMG Retail Sales Monitor August 2007

¹ British Retail Consortium UK Retail Sales Monitor August 2007

2007/2008 % of income rise accounted for by non-discretionary spending

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