Consensus forecasts for companies in the general retail sector, says John Stevenson, retail analyst at brokers Shore Capital, predict significant rises in earnings. This is worrying, because a number of factors suggest retailers' earnings are set to come under pressure in 2008, and if earnings fail to hit consensus forecasts, then there's a clear danger of downgrades, which would have a negative impact on retailers' share prices.
First, consumers' disposable income has fallen due to five interest rate rises in 18 months (rate rises can typically take 12 to 15 months to hit consumer spending patterns), food-price inflation and high oil prices. Mr Stevenson says there's an acceleration in people coming off lower-interest fixed-rate mortgage deals, while the margin between the variable mortgage rates and the Bank of England base rate has increased markedly, suggesting further pressure on disposable income.
If that wasn't enough, there's also a tightening of unsecured credit availability following the credit crunch, as well as rising rates of interest on unsecured credit (such as credit cards), while consumers are, says Mr Stevenson, "probably less keen on racking up credit". This, again, can have a negative effect on consumer's willingness to spend.
And you can add to the mix a drop in housing equity withdrawal, which Mr Stevenson estimates could take half a percentage point of retail sales growth in 2008. He said: "This in itself doesn't sound that huge, but retail sales growth is only around a couple of per cent anyway." Consumer confidence, however, has held up remarkably well, but this too could come under pressure from a flattening housing market, while the credit crunch also means the kind of buyout potential that supported retailers' share prices in 2005 is there no more.
