Our struggling retailers face years of creative destruction

 
Allister Heath
WE are now reaching a tipping point for British retailers. A combination of historically weak growth in consumer spending and a new phase in the digital revolution is on the verge of destroying many business models. As online sales continue to boom, and those from stores start to slide, rather than merely grow more slowly, it will soon become apparent that vast amounts of retail space are no longer required, replaced instead by out of town depots and warehouses.

So far, specialist or minor retailers in areas most affected by the internet have folded as a result of the technological revolution; Begbies Traynor has 140 retailers on its critical list. Yet the pain will soon spread. Stores have a highly leveraged economic model: a small rise in sales delivers lots of profits but small declines can be crippling.

There will still be a need for most shops, of course, as well as pick-up facilities as the “click and collect” approach to retail continues to grow. But it is likely that hundreds of stores – including some large supermarkets and even some second-order retail parks – will eventually become surplus to requirement. If so, government planners need to act fast to allow their use to be changed. Some could be turned into leisure facilities such as gyms, others into schools as the demand for places keeps on growing as a result of the baby boom – and others into much-needed housing. Retailers’ woes are not merely cyclical: they are undergoing a fully-fledged process of creative destruction. It is too soon to tell where this will end.

NOT FREE ENOUGH
Britain is now a slightly freer economy than it was last year; for the first time in five years, its score on the Heritage Foundation’s index of economic freedom has gone up, rather than down. But despite all the huffing and puffing, austerity and political warfare, we have only increased our score by 0.3 points (to 74.8) since 2010, when the coalition was elected. We are still ranked a miserable 14th globally, up from 15th.

The report also reveals a negative correlation between countries that increased public spending and economic growth rates. The relationship is especially negative in the case of advanced economies (a one per cent hike in spending is associated with a reduction in growth of 0.46 per cent). Of course, correlations don’t imply causation – weak economies may have responded by hiking spending, so the causation could go the other way round. But there is lots of rigorous econometric evidence that big governments are bad for growth. Unless the coalition does more to free the economy, low growth will be here to stay.

HAWKS WIN
It is unusually good news that the statistical authorities have chosen to keep intact the retail price index, the traditional and broadest measure of inflation, rather than change its composition in a way that would inevitably have reduce the reported rate of price increases.

Official attitudes towards inflation are softening. There is again a growing belief in the existence of a trade off between growth and inflation, at least in the short term. Inflation erodes the real value of debt, an appealing thought in ultra-leveraged economies. Central banks are becoming less independent. Governments are running massive deficits and are happy for them to be monetised. So I’m delighted that it will now be a little harder for the authorities to allow prices to rip. But for a fascinating counter-view, read George Trefgarne’s analysis on page 19.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath