Should we blame the Olympics for retail sales slump?

5th September 2012

The first point to make is that the figures are far from drastic. Sales were down 0.4% compared with the same month last year and 0.6% on 2010, according to the British Retail Consortium (BRC). Indeed the key sentence in the report, missed by most of the mainstream coverage, was that "the net effect of the Games was minimal as lower footfall in London was offset by a better performance in the rest of the country".

As such, while the games appear to have failed to help retailers overall their impact was limited in a month that Helen Dickinson, head of retail at KPMG, acknowledged is a "traditionally a weak month for sales". It may be tempting, even accurate, to blame politicians for over-egging the effect that hosting the Olympics would have on the economy but this does little to explain the underlying trend.

Dreaming of a bright Christmas

Poor retail sales may conjure up an image of deserted streets in people's minds but such a vision is not supported by the data. As suggested by the above quote, the drop in the number of London shoppers did not drive a slump in overall UK sales.

Instead the BRC claims that the greatest impact of the Olympics was on online sales, which grew only 4.8% over the month. This is its slowest rate of growth since data started being collected in October 2008.

However, is blaming the games for falling online sales a little bit of a stretch? Admittedly if people went away over the month to avoid them, then this could have had an impact for both online and high street retailers. Yet some of this could be considered deferred spending that will appear in the months to come.

Given that August is a traditionally weak trading month few will have been placing all of their hopes on it proving a wild success and for most, Dickinson says, "it's really the next three months that will have a critical impact on retailers' profitability". All eyes will now be on the run-up to Christmas to see whether falling sales are a temporary Olympic blip, as the BRC suggests, or part of a broader downwards trend of consumers cutting back.

The problem

There is mounting evidence that households are choosing to rein in spending in response to signs of an economic slowdown. In July credit card lending fell £147 million, its biggest net drop for nearly six years, suggesting households were focusing on reducing their debt rather than looking to finance new purchases.

Although credit card debt has fallen almost £5 billion since its peak in 2010 the July numbers mark a step change in the rate that households paid it down. If this trend continued into August then the retail figures could mark the beginning of a disappointing second half of the year for UK shops.

"The paying down of household debt has been happening for the last couple of years, but has anything really happened in the last few months to increase the rate of repayment? Not really," says Azad Zangana, European economist at Schroders. "I would like to see some more data but if there is a continued drop in credit card lending then that would be a concern."

That we should be wary of blaming short-term or one-off factors has been aptly demonstrated in recent years. The Bank of England, for example, has had a torrid time attempting to blame persistent above-target inflation on a series of short-lived effects. In looking too closely at the trees, it is all too easy to miss the wood.

For Britain consumer confidence is crucial to achieving and maintaining an economic recovery. If the figures do indicate underlying demand weakness then appeals for a change in economic policy may begin to get louder. Rather than looking to blame the Olympics, for which the government deserves some credit, in this environment investors should keep a close eye on longer term trends.

 

More on Mindful Money:

Eurozone PMIs – Reasons to be cheerful?

What happened to economic growth?

Is Goldman Sachs to blame for everything?

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