Much has been said about the problems faced by the high street: high rents and rates; competition from online retailers; the legacy of past over-expansion; and changing customer habits. There’s one other danger, though, that is under-appreciated – from cointegration.
To see what cointegration is, imagine a drunk walking home with his dog on an extendable lead. The drunk is wandering all over the road and the dog is running hither and yon. At any point in time, the two might be some way apart. But we know they’ll reach the same place eventually. And this means that the further apart they are the more likely it is that they’ll move closer together. The drunk and the dog are cointegrated.
The same is true of some pairs of economic variables. In the short term, they might move apart. But when they do they must move back together: this is the logic behind pairs trading strategies. The problem for retailers is that they could get hit by not one but two cointegrating relationships.
The first is that between productivity and real wages. In the long run, these should move together – and in fact they have in the UK: if we produce more we can pay ourselves more, and if we don’t we can’t. In short term, though, the two can deviate. And they have: next week’s figures will show that real wages have recently risen faster than productivity.
Cointegration warns us that the two must therefore move closer together – which means real wages must fall relative to productivity. This could happen if we get a burst of productivity improvement. But there’s no sign of this and no reason to expect it. And even if it happens, it’s likely to be because companies shed labour – and rising unemployment is bad for consumer spending. Instead, there’s a danger that real wage growth will fall back. And that means customers won’t have so much to spend. Which is bad for retailers.
There’s a second cointegrating relationship – that between incomes and spending. In the long term, these must rise together: if they didn’t we’d all end up either as misers or bankrupts. Recently, though, spending has grown faster than incomes. The savings ratio has fallen to its lowest rate since the late 1950s. Eventually, it might rise as households decide to rebuild their finances. In fact, there are already signs of this: Bank of England data show that consumer credit growth has slowed to its lowest rate since early 2015. When this happens, spending will grow slower than incomes – which means by very little.
Now, to some degree these are opposing threats: if real wages fall households might borrow more to sustain their spending. Nevertheless the pair of them warn us of the danger of a long period of weakness in retail sales; if one of them doesn’t hit spending, the other will.
This means retailers’ problems cannot be solved by technocratic fixes such as a reform of business rates (although this might be a good idea) or tax on online shopping (not such a good idea). Instead, they are more fundamental than that. Perhaps retailers are in a similar position to manufacturers in the early 1980s: they face a long period of decline.
