Reduced real income will hit retail

RETAIL sales fell in September for the second month in a row. Real incomes are suffering and consumer confidence is weak. Some are questioning whether Apple’s disappointing iPad sales figures last week are a sign of things to come. So should spread betters take the hint and shun the sector?

Demand certainly looks like it is built on shaky foundations. Consumer spending might look fairly strong for the third quarter, but it has been achieved from lower savings. The reality is that real incomes are taking a hit: total earnings have only risen by 1.7 per cent over the past year, consumer price index inflation is running at 3.1 per cent, while the retail price index measure is at 4.6 per cent. Ian Stewart, chief economist at Deloitte, says real average take-home pay has fallen 3.2 per cent in the last 12 months – deflating for the tax and price index, a measure of the impact of inflation and direct taxes.

People are becoming shorter of cash. Big-ticket items are always first to be lopped off the shopping list. Electrical suppliers such as Dixons might soon be worth avoiding. But Michael Hewson of CMC Markets argues Christmas and the coming VAT hike could hurry reluctant shoppers. He also points out that the current pessimism has been influenced heavily by the fear of rising unemployment. He remains bullish on the sector until after Christmas.

There are also reasons to be sceptical from the supply side. Henry Dixon of Matterley, part of Charles Stanley, says: “Many prefer to concentrate on trying to predict demand but that is subjective. Supply conclusion is more definitive. Retail for us is a sector that suffers from chronic oversupply. It is also worth noting that goods now cost the retailer more, owing to currency and inflation.”

Longer-term, the outlook for the retail sector does not look good, though it depends on how fast the private sector creates jobs. But seasonal cheer and tax-efficiency could keep the sector moving upwards until Christmas. As we go into 2011 it might be wise to diversify your portfolio and concentrate your research elsewhere.

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