How Taylor Swift may have helped cancel Christmas for retail
When angsty US mega pop star Taylor Swift sings about breaking up with her (many) past loves, the economic dial shifts. Fans’ spend related to her Eras tour in the UK in June was expected to reach £1bn. However, this time it looks like Swift-mania has shifted the dial against UK retail.
June’s inflation figures showed that while the headline CPI rate was steady at 2.0%, services prices were up 5.7% on last year. Hotel prices, boosted by demand led by Swift’s tour, jumped by 9.9% against June 2023. Other services like insurance and broadband subscriptions showed similar hikes.
So on 1 August the Bank of England grudgingly knocked a quarter percentage point of interest rates, taking the base rate down to 5.0%, but signalled that further reductions in services inflation would be needed before it made any more downward moves. It also said it expects annual rises for the CPI overall to go back up to 2.7% in the final quarter of 2024, before declining next year.
This is bad news for retail. Commentators are still trying to blame bad retail figures on everything from the weather to the hangover from the cost of living crisis and even uncertainty around the general election. Certainly these are part of the mix, but the biggest factor by far is that households that have any spare money are saving like crazy, driven by the best real (i.e. post inflation) returns in years. Since a low point in autumn 2022, the real interest rate has surged from negative 8% to over 3%. As a consequence, as can be seen from the chart below, consumers think it’s the best time to save (orange line) since early 2008 – 16 years ago.
Source: ConsumerCast, GfK, BoE, ONS
The Bank’s announcement means that even if inflation does tick back up in the later months of this year, the real interest rate will remain strongly positive and the savings trend is likely to carry on.
What is more, according to the Bank of England, UK consumers are squirrelling away the money in longer term forms of savings like ISAs and interest bearing time deposits, suggesting that the piggy-banking trend is not just a transitory phenomenon.
Source: Bank of England
All the “excess savings” that households built up over time (up to £338bn according to the Office for National Statistics) are unlikely to be coming back into circulation soon, particularly since recent inflation (24% in the last four years) has taken a massive chunk of up to £500bn out of the real value of the UK’s £2.1trn household savings mountain. In a sense, therefore, they are just getting back to where they were before the Pandemic and recent inflationary spike happened.
And the latest spending patterns are not reassuring, even taking into account recent poor weather in June and the first half of July. Fashion and homewares stalwart Next saw store-based sales down 4.7% in its latest quarter, only being boosted by its growing third party brand Label and overseas businesses. According to the ONS, June retail sales were down 0.1% in value and 1.0% in volume and figures from the British Retail Consortium showed July growth of just 0.5% on last year, driven by food and non-food declining 1.7% (in-store down 2.7%). Wider consumption patterns are also weak, with Barclays UK Consumer Spending Report indicating a fall of 0.3%. Exceptions to the trend were health and beauty (+6.4%), pubs (+4.9%, and travel (+4.3%).
The contribution of extra saving to this situation is significant. ConsumerCast figures for June indicate an extra £2.6bn saved compared with a year earlier. With total monthly consumer spend that month of £106bn, that’s 2.5 percentage points cut off growth, enough to move the dial down from respectable growth to stagnation or even continued recession.
So what are the prospects for the last five months of the year? The latter half of 2023 was already weak, so some support will come from base effects i.e. consumer spending including retail has already hit rock bottom and the only way is up. Grocers will benefit from the end of inflation and trends to eating and drinking at home. Fashion, which has suffered a truly atrocious period, will see its fortunes depend more than ever on weather patterns and takeup of new trends. If retailers can capitalise on the need for wardrobe renewal of key outerwear items after recent lean autumn/winter seasons, then a revival might finally be on the cards. Home goods, given the state of the housing market with high interest rates, shouldn’t look for much of a recovery, more a stabilisation.
The outlook for late 2024 is therefore “more of the same”, albeit with potential for more price-driven promotions to spark sales volume growth, the need for investment in ad campaigns to stimulate interest in new ranges (especially in fashion) and further cost cuts to make up for sluggish or absent top line growth. To quote from the Swift classic, Christmases When You Were Mine:
“Merry Christmas, everybody”…
That’ll have to be something I just say this year.
Title Photo: Stephen Mease on Unsplash