It’s easy to get caught up in the headlines, isn't it? Especially when it comes to the economy and how it might be affecting our wallets. We’ve all heard the whispers, perhaps even felt it ourselves – that cautiousness when it comes to spending. And looking back at 2011, it’s no wonder. The combination of a sluggish economy and the sting of high inflation really took a bite out of real incomes, leading to the steepest fall we’d seen in household incomes since 1977. Naturally, this translated into a noticeable dip in consumer spending.
But here’s where things get interesting. More recent data, stretching into early 2012, has started to hint at a shift. It seems shoppers might be feeling a little more inclined to open their purses, or perhaps they’re just not as worried about squirreling every penny away for a rainy day. While some attributed the uptick in late 2011 to aggressive discounting by retailers, the actual figures suggest the discounting wasn't quite as dramatic as it seemed. Still, that comparative strength appears to have carried into the first quarter of 2012, with March seeing the biggest jump in retail sales in over a year. Even when you strip out the temporary surge in fuel sales – a bit of a panic buy due to potential tanker driver strikes – retail sales were still up a respectable 1.5%.
So, are we seeing a genuine wave of optimism washing over UK shoppers? Well, if they are feeling more positive, they certainly aren't broadcasting it to the pollsters. The GfK consumer confidence index, for instance, actually dipped in March and stayed low through April. And it’s understandable why. While there are some glimmers of hope, like improvements in the job market and inflation slowly drifting downwards, the shadow of a potential “double-dip” recession still looms. Even a small contraction in GDP, while perhaps statistically minor, can cast a long shadow over consumer confidence, and in the world of retail, that confidence is king. It’s likely to put the brakes on a full recovery in the sector.
Now, you might be thinking about the big summer events – the Jubilee and the Olympics. They could certainly give consumer confidence a temporary lift. However, based on past experiences, like the Royal Wedding, and how other Olympic games have played out, we shouldn’t expect a massive surge in retail spending. History shows that while bars and restaurants might see a boost, other areas often see spending dip below seasonal norms. It’s more of a localized effect, really.
Looking further ahead, as summer gives way to autumn, we should see the inflationary impact of fuel prices continue to wane, pushing the headline inflation rate closer to that 2% target. Earnings growth has been pretty steady, hovering around 1.5% to 2% for a couple of years, and it’s unlikely to skyrocket, especially with public sector pay freezes. However, there are signs that private sector wages are beginning a very gentle recovery. This leads us to believe that the sharp decline in real earnings we’ve witnessed might start to reverse by the end of 2012. And as we move into 2013, consumers are likely to feel a bit more cheerful. A budding recovery in house prices, particularly in London and the South East, will add to that positive sentiment. With interest rates expected to remain low and inflation below target, we should see a gentle, but welcome, upturn in both real incomes and household spending next year.
On the investment side of things, the first quarter of 2012 saw a significant drop in the volume of investment flowing into the retail warehouse sector. However, this doesn't necessarily signal a loss of interest. It’s more likely a reflection of a reluctance to trade, meaning investors are holding onto their assets rather than actively buying or selling. Retailer demand, contrary to some pessimistic forecasts, isn't as weak as you might think. Active management and expansion, especially around the bustling London and South East regions, are actually helping to bring vacancy rates down. It’s a complex picture, certainly, with pressures on valuers to adjust values, particularly for secondary locations. But beneath the surface, there’s a resilience and a quiet optimism building.
