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What high street slump?

Created:
6 June 2008
Written by:
Chris Dillow

What are the chances of a slump in high street spending? Granted, the recent figures have been grim. But I suspect many of the threats to spending are smaller than thought.

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Take petrol prices. Each 10p rise in the price of a litre - which is what we've had so far this year - would, if sustained over a year, take £2.5bn out of our pockets, if we drive as much as ever. But this is only 0.3 per cent of last year's disposable income.

Higher mortgage rates for those whose fixed-rate deals expire this year are only a slightly bigger problem. The Financial Services Authority has estimated that 1.4m people will pay £210 a month extra because of this. Nasty for them. But only 0.4 per cent of aggregate disposable income.

Nor am I worried by the housing market. Not because this will recover soon - forget that - but simply because housing is not net wealth. House prices affect spending not by making us poorer but by limiting how much liquidity-constrained homeowners can borrow. But this is a weak effect. One good estimate reckons a 10 per cent fall in house prices, other things equal, causes only a 0.4 per cent fall in spending.

Nor even does the credit crunch seem a big macroeconomic problem. Indeed, consumer credit growth has actually accelerated so far this year.

So, what are the problems? One is inflation. This traditionally cuts spending by causing folk to save more. But unless there's a nasty surprise, inflation will fall next year.

Another danger is the product cycle. Eventually, we'll have all stocked up on plasma TVs and Wiis and, if there are no equally attractive new products following behind, spending will fall simply because there's nothing to buy. But there are few signs that this is an immediate problem.

Instead, the biggest danger to spending is what it always has been: the labour market. And here, the clouds are gathering. Unemployment has begun to rise, and deteriorating corporate finances suggest it might continue to do so.

But none of this suggests spending will drop very sharply. So perhaps the gloom is overdone.

This isn't necessarily good for retailers. The fact that DSG, Debenhams and HMV have done so badly in recent years even as sales boomed shows that retailers' problem is not aggregate sales, but rather how to convert demand into profits.

What it does mean, though, is that the Bank of England will need a lot of persuading before it cuts interest rates.

MORE FROM CHRIS DILLOW...

For more articles by Chris Dillow, see the MARKETS page or his columnist page. Chris blogs at http://stumblingandmumbling.typepad.com

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