28th October 2011
The consensus among economists is for slow growth and no revival in consumer spending in developed markets in the near term. But then how can the recent strong performance of Visa and Mastercard be explained, both of whom report increases in credit card spending? Or expectation-beating retail sales figures in the US and UK? Could it be that things are not as bad as they are billed?
Mastercard and Visa
Both Visa and Mastercard have recently reported strong sales figures: Visa said that its seventh consecutive quarter of growth in its US credit-card business has been driven by affluent cardholders.
So even though it is the ‘affluent’ that are still spending, rather than the majority of the population, someone is supporting consumer growth and for the economy, that is all that matters. Retail sales figures have supported this view.
In the US, retail sales figures have been buoyed by cars, furniture, petrol and electronics. In the UK, after a weak month in August, retail sales were up again in September. There were pockets of strength and weakness – internet sales rose fast, while clothing sales dipped. The statistics showed that small stores are growing faster than bigger stores, suggesting consumers are still being discerning.
However, it is not quite back to the races yet. Simon Ward, chief economist at Henderson, points out that the effect of inflation cannot be ignored:
“Consumer spending has been increasing solidly in cash terms – retail sales rose by 5.3% in the year to September. The trouble is high inflation, meaning consumers get less for their money – hence retail sales volume is up only 0.7% over the same 12-month period."
“The good news is that inflation will fall next year, though not by as much as the Bank of England claims. RPIX inflation (i.e. excluding mortgage costs) may fall from 5.7% currently to about 3.5% by mid 2012. “
“Average earnings growth, meanwhile, may pick up a bit from the current 2.8%, based on recent pay settlement levels. The latest national accounts figures, moreover, show that households have made better than expected progress in bolstering their finances, with the saving ratio at 7.4% in the second quarter versus an average since 1995 of 5.9%."
“So it seems likely that consumer spending will continue to expand respectably in cash terms next year, with a better split between inflation and volume growth – retail sales volume could increase by 2% or more, the fastest since a 3.2% rise in 2007.”
The consumer is likely to continue to be discerning. The high street is polarising into the ‘survivors’ and the very weak. This Reuters piece highlights some of the conspicuous losers on the high street:
“Last week household goods retailer Argos posted a 94 percent slump in first-half profit, while on Tuesday Carpetright, Britain's biggest floor coverings retailer which is suffering from a stagnant housing market, warned on full year profits.
“On Thursday, struggling British cards and gift retailer Clinton Cards posted an 83 percent slump in year profit, hit by a combination of low consumer confidence and intense competition from supermarkets and the Internet, while outdoor goods specialist Blacks Leisure posted wider losses.”
Even stock market darling ASOS is feeling the pinch.
Disposable income has undoubtedly been hit by spending cuts and inflation. This piece in the Guardian, based on an Asda survey suggests that the average household is £60 per month worse off.
Although the majority of responses to the article are lamenting the comparative wealth of hedge fund managers and bankers, there are some dissenting voices: Guardian commenter rationalistx, for example, argues for some moderation in people’s response to the fall in income:
“£60 a month is £720 pounds a year. The majority of households could easily reduce their expenditure by that amount by cutting back on luxuries like drinks, cigarettes, unnecessary car journeys, expensive holidays and so on. Buying clothes on E-bay can also save you a fortune. There's no need to panic.”
The only reason to panic might be if the Visa/Mastercard results suggested another credit-fuelled spending binge. Shaun Richards suggests:
“You could argue that people haven’t got cash and are therefore spending on credit cards. It would certainly be good to know whether this is simply another form of excess spending. There has definitely been some deleveraging but you have to be very careful with statistics. There may be one group that is deleveraging substantially, and another that is still existing on credit. It is almost impossible to pull them apart. “
“Very few of the spending cuts in the UK have yet come through. And while not diminishing what some people have been through, at a collective level it has not seen its full impact yet. Fear is almost impossible to measure.”
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