The Economy, Brexit and Retail in 2017

Transcription

1 The Economy, Brexit and Retail in 2017 Here s What You Need to Know March

2 Economy 2017 Contents 1. Brexit Reaching Consumers 2. Inflation Drivers 3. The Financial Markets 4. Five Questions to Ask 5. Discussion Boris Planer Global Chief Economist, Planet All images Planet Retail Ltd unless otherwise stated. 2

3 Brexit Reaching Consumers 3

4 BREXIT REACHING CONSUMERS The impact of Brexit on consumers was moderate in H should look more challenging for retail. Key scenarios to watch out for: Risk-averse employers to manage cost, expect weak salary hikes and job creation in the wider economy Weak pound and commodity prices to drive inflation, creating pressure on real incomes Risk of interest rate hikes in medium term What it means for consumers and retail: Potential return of recessionary behaviours (cocooning, cuts on non-essential items) Customer-focused initiatives (à la Feed your Family for a Fiver) Retailers to review supply chains, drive efficiencies comprising measures from soft to hard (salary cuts, layoffs, automation) Reminder of wider need for recession-proof formats (upgraded discounters, experience-driven superstores, online...) Rather than an event, Brexit is a year-long process. 4

5 PER CAPITA FIGURES ARE INDIACTOR OF WEAK CONFIDENCE 4 UK, Post-Referendum Retail Sales Growth Forecasts, (%) Modest recovery as post-brexit order takes shape and some pent-up demand is set free by consumers Slight setback followed by moderate recovery as post-brexit realities define economic life -3 Source: Planet Retail Retail sales slump in real terms as consumers cut down on discretionary, big ticket, deferrable items amid spreading job worries and an inflationary boost. Real Growth (%) Nominal Growth (%) Real per Capita (%) Nominal per Capita (%) By 2022, nominal retail sales could be 7.5% lower than under non-brexit conditions, showing the size of the referendum s long-term impact. The weak levels of per capita growth indicate consumers will feel fairly insecure over the forecast period, with implications for spending activity. 5

6 Inflation Drivers 6

7 PRESSURES ON THE POUND Since the referendum, the pound has lost 16% of its external value against the USD, and 10% against the EUR (February 2017). The more dependent a business is on imports, the more vulnerable it will be to a weak pound. Manufacturers: Price of materials & fuels bought for processing (input prices) up 15.8% y-o-y in December, and up 20.5% in January Consumers: CPI gathering momentum, up 1.8% y-on-y in January 2017 mainly driven by energy for now Non-food suppliers difficult to subsitute (consumer electronics, textiles), meaning in grocery hypermarkets most vulnerable. With 39% of food sold in UK imported, retailers to strenghten domestic sourcing over time. Food inflation momentum building from low level Retailers choice: absorbing cost, squeezing out cost or price hikes. Latter hardly an option, European suppliers already feeling the diffference Weak pound opening doors to accelerated expansion of Aldi and Lidl in historic opportunity; threat to established domestic grocers. 7

8 COMMODITIES AND LABOUR Commodity price increases in dollar terms will push up the British cost of living with double momentum. Fuels and transport account for around a quarter of household expenditure, twice as much as food, drink & tobacco The price of crude oil has nearly doubled over the past year In January 2017, UK fuel prices were up 16.8% year-on-year; two-car families now paying GBP40 extra per month Transport costs up 5.7% in the same period Shortage of unskilled labour to hit traditional low-wage industries like retail, manufacturing, foodservice, tourism and agriculture, who have benefitted from Central European immigrants. Limiting access to these should create disruption in business, drive up the cost of labour, trigger retaliation in Brexit negotiations with EU and accelerate automation in business. Geographically, implications biggest in London (40% out of 8.6 million people are immigrants). 8

9 The Financial Markets 9

10 RISKS TO INVESTMENT AND JOB CREATION Risks to investment and job creation coming from a potentially weaker finance industry, as well as a medium-term risk of higher interest rates. Worried about losing access to EU single market (as granted by passporting rights), several major financial firms now contemplate shift of resources to Continental Europe. Frankfurt, Paris, Dublin, Amsterdam, Warsaw all advertising themselves with resolution as alternatives. Announcements in mid-2017? Around 5,500 banks, insurance companies, asset managers etc potentially affected. Rising inflation could force Bank of England to raise interest rates Potential impact on housing market as well as associated retail segments, such as furniture, DIY, gardening, household electroncis. 10

11 Five Questions to Ask 11

12 FIVE QUESTIONS TO ASK IN Will consumers feel the pressure in 2017? Very likely. A rise in inflation, weak job creation and slow income growth will all put pressure on spending power; in a worst-case scenario, real per capita incomes could drop by 4-5%. 2. Will European elections influence the Brexit deal? With certaintly. Elections are due in the Netherlands, France and Germany in These will influence how united the EU will stand in its talks with Britain, and how willing to compromise it will be on single market access. 3. What s the likelihood of a great deal for Britain? Fairly small. The EU will be keen to show how that the EU does not pay off, and most members have shown they will consider their own national interest in any deal. 4. Will financial fims move jobs out of the UK? Very likely. Several banks are planning to move functions into Continental Europe in 2017 to avoid being surprised by a loss of passporting rights should UK-EU talks fail. 5. Can Bexit be avoided? Unlikely. However, should the Prime Minister s Brexit deal be rejected by parliament in late 2018, this could trigger snap elections. Equipped with a mandate, a new government could pull the plug on Brexit although this is purely hypothetical at this point in time. 12

13 Five Questions to Ask All images Planet Retail Ltd unless otherwise stated. 13

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