SO the clocks have changed, there’s now more daylight than darkness and spring is here. It’s time for some optimism, unless you happen to be a retailer. In the last week some of the biggest names in the high street have been queuing up to tell us how fearful they are about the consumer. Of course there are a host of reasons, not least higher taxes and the prospect of public sector job cuts after the election.
CHALLENGING AND CAUTIOUS
Sainsbury’s Justin King called the environment challenging, Ian Cheshire from Kingfisher said he was cautious about consumer demand and Next boss Simon Wolfson said that whichever way the government balances its books, the results will be uncomfortable for the consumer. Yet those comments came just after Next topped forecasts with an 18 per cent rise in 2009 profit and Kingfisher beat forecasts with a 49 per cent rise in its full year numbers.
So what’s going on, despite all the dire predictions – was last year really as good as it gets for the consumer? Unemployment certainly wasn’t as bad as feared and those with jobs and mortgages benefited from interest rates at record lows. By contrast, this year unemployment can only get worse once a new government gets to work with public spending cuts – and interest rates can only go up. That, at least, is the consensus thinking, which makes me think there’s a good chance it will be wrong.
For a start, last year’s conditions were about as bad as it gets. As Philip Shaw from Investec points out, household consumption collapsed 3.1 per cent, employment fell 1.6 per cent and pay growth, as measured by average earnings, registered zero over the year. By contrast, this year should see some pick-up in earnings, perhaps stabilisation in the number of jobs, and no more meaningful rises in the savings ratio.
This could be key, because there’s already been a huge readjustment in household balance sheets. This caused the savings ratio to rise by over 8 per cent last year, having been in negative territory at the start of 2008.
Also I wouldn’t trust economists to be accurate forecasters and if businesses want to outperform it’s in their interests to play down expectations. Many oracles got it wrong last year and in a recovery phase there’s always a tendency to underestimate the potential for a rebound in confidence. A clear mandate for a government post-election, some policy stability and a little growth could do wonders.
Andrew Sentance from the Bank of England told me he expects substantial fiscal consolidation. If that’s right, then homeowners will also continue to enjoy these low interest rates for quite some time. Pessimism is priced in; for better odds, you should bet the other way.
Ross Westgate co-presents Worldwide Exchange and anchors Strictly Money each weekday on CNBC.