Wage threat to retailers

By Chris Dillow, 22 January 2010

Real wages are falling. Today's figures show that average weekly earnings rose by 0.9 per cent in the year to November, to £451. That's a full percentage point less than the rise in consumer prices over this period. And given that inflation leapt by a percentage point in December, it's almost certain that real wages fell even more in the year to then.

Three things make this contrast odd.

1. There has traditionally been a decent correlation between real wage growth and retail sales growth: 0.43 since January 1991.

2. Employment has slumped in the past year - the number of full-time workers has dropped by 594,000, or 2.7 per cent, in the past 12 months. This should have depressed spending relative to real wages.

3. The difference between spending growth and wage growth can't be explained by borrowing. Consumers have slightly repaid non-mortgage debt in the past 12 months.

So, what explains the resilience of retail sales in the face of falling real wages?

One thing is that spending has switched towards shops and away from non-retail spending. In the year to Q3, spending on restaurants and hotels fell 6.4 per cent, spending on education fell by 7.7 per cent, and spending on recreation and culture fell by 3.8 per cent (table E3 of this pdf). But spending in shops grew 2.6 per cent.

If people spend £20 on food to cook for themselves rather than £50 on eating out, retail sales will grow by £20 - but overall spending will fall by £30.

A second thing is that mortgage rates have fallen in the past 12 months. So people with big mortgages who have kept their jobs have enjoyed a big rise in disposable income. These have been able both to repay debt and to go shopping.

Which brings me to my concern. It's possible that the first of these supports to retail spending might fade away. In a sense, it has to sometime, otherwise all pubs, restaurants and cinemas will eventually close. And it's certain that the second of them will disappear. Mortgage rates stopped falling months ago, and the next move in them - which might admittedly be some time off - will be upwards.

This means that retail sales growth could fall back towards real wage growth. Which could be nasty for retailers, because this will be low. As Mervyn King said (pdf) last night: "The patience of UK households is likely to be sorely tried over the next couple of years. There is little scope for growth in real take-home pay, which may remain weak even as output recovers."

All this said, the official figures released on Friday for December might be strong, if only because shoppers rushed to beat the VAT rise. Beyond then, though, we could be in for some weak readings from the one part of the economy that has held up well during the recession.

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