Sales on the high street were surprisingly strong in January, reports the British Retail Consortium. Retailers saw their strongest sales growth in more than six months, beating gloomy City forecasts.
So is it time to go out and stock up on retail shares? Sadly not. Let’s take a closer look at the figures…
High street sales aren’t quite as good as they look
Retailers did better than anyone expected in January. Total sales by value were up 3.2% on last year. Like-for-like sales (excluding new retail floor space) were up by 1.1%.
But if you look into the make-up of the sales, things aren’t quite as rosy. Much of the rise was down to higher food prices, after Christmas discounting by supermarkets. According to The Times, “the value of non-food sales remained down on a year before despite big discounts.”
So in other words, the total value of sales was higher because food got more expensive. That doesn’t sound like grounds for optimism to me.
It also raises a bigger question. Is inflation really on its way out? Certainly, inflation figures fell sharply in December, but that was down to the VAT cut (Can Darling’s VAT cut save the UK economy?). Excluding the tax cut, CPI actually rose, from 3.9% to 4.1%. I’m not saying we won’t get deflation at some point this year. But I’m not sure it will stick.
There’s a lot of spare capacity on the high street – in other words, too many shops and not enough shoppers to fill them. But that won’t last long. We’re already hearing of small towns where the entire high street has been wiped out, with the demise of Woolworths hitting particularly hard.
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If the spare capacity vanishes faster than demand for goods (and remember that for things like food, demand can only fall so far) then there’s no reason for prices to fall. In fact, the shops that survive will be in a better position to set prices.
There’s also the small fact that the weak pound makes imports from China and most other places more expensive. If that continues, then shops will be unable to do anything but hike prices later in the year, or face making a loss on sales. And of course, China’s also having its own problems. A lot of the spare capacity there – too many factories, not enough demand – is being scythed away. Again, that’ll leave the survivors in a better position to bargain on prices.
The boom times drove shop prices down – but now they’re over
It’s easy to forget that the boom times were also an era of rampant disinflation. All the cheap money flooded into assets, and pushed up those prices, and eventually commodity prices. But consumer goods just kept falling in price. That’s globalisation for you.
Now we face dramatically deflating asset prices. But at the same time, many of the pressures and forces that have been pushing down the price of consumer goods are fading away. With fewer retailers around, there’s less competition on the high street. With fewer suppliers around, and sterling weak, retailers are in a weaker bargaining position. And if trade wars and tariffs start racking up, that’ll make things even worse.
During the boom times, a newspaper columnist wrote that it had never been so expensive to be rich – as cheap money buoyed the price of all the assets consumed by the wealthy, such as luxury homes, art, boats and first class travel. Now all those things will have to come down in price – and the genuinely rich will find themselves bargain-hunting amid the rubble.
But those at the other end of the scale might find they’re not so lucky. I suspect the disinflation of recent years is coming to an end. How it’ll all pan out in the figures remains to be seen, but even though we probably will see consumer price deflation this year, right now I don’t see it being around by the end of 2010.
The housing market has further to fall
Talking of falling asset prices, the housing market isn’t looking any healthier. Interest is picking up, says the Royal Institution of Chartered Surveyors, but nobody’s buying – estate agents sold an average of just 9.9 properties each over the past three months, another record low for the survey (which started in 1978).
I can see why interest might be picking up. The property market is like any other market – once prices have been falling for long enough, people start to wonder if they might be on to a bargain. And as one estate agent points out, none of the broader surveys yet show just how hard hit the property market has been. There are some very hefty discounts out there – 50% or more – where people are forced sellers.
But as James Ferguson points out in the current issue of MoneyWeek, you shouldn’t get too excited as yet. House price crashes take a long time to bottom out, and there’s a long way to go before property hits rock bottom – on both sides of the Atlantic. Subscribers can read the article online here – Worse to come for property markets on both sides of the Atlantic. If you’re not a subscriber, right now you can get a sample issue of MoneyWeek completely free. But hurry, this offer is for a limited time only.
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