Corporate UK must spearhead return of consumer confidence

A mid-year mystery that’s developing in the retail sector and among those who analyse it in the City is why consumer spending resolutely refuses to recover. The economy has turned out this year to be altogether more robust than anyone anticipated the other side of Christmas, yet retail sales remain flat.

Unemployment and interest rates are relatively low and psychologists are keen to tell us that the millennium factor is an optimistic element in the mix. The dawn of a new era is meant to be accompanied by a massive desire on the part of the populace to go out and spend more.

But it just isn’t happening. The three-month average is at its lowest level this year. This is particularly odd, since research indicators would seem to be suggesting that business and consumer confidence have picked up during the first half of this year. This is partly to do with the phantom recession – the economic collapse widely predicted towards the end of last year has turned out to be a false alarm and experience tells us that consumer behaviour normally over-reacts to economic surprises. But it’s just not happening.

One explanatory theory has it that new and more flexible employment models, driven by the efficiencies of information technology, have led to increased job insecurity during a period when unemployment is actually falling. Against that, a lack of inflation and low interest rates are relatively weak stimuli.

The efforts of retailers to talk up the market are, at best, rather sad. Marks & Spencer said things were picking up as it announced its horrendous results recently. Picking up where? When you’re in the kind of hole that M&S is in, it is probably advisable to stop digging.

M&S would be right, however, to speak of hot-spots in some areas of the retail sector – just not the ones that it is in. The discount chains, such as Matalan, are actually doing rather well. Apparently, the George clothing brand owned by Asda is also showing good growth. But these factors only serve to underscore the caution in consumer spending – it’s a buoyancy born of trading down, rather than any cause for greater optimism.

Not so, says Verdict, the research consultancy. More than half of a recent sample of 3,000 consumers said they were more concerned with quality than price. But that may be just another example of what respondents say to their researchers, while stubbornly behaving otherwise in real life.

That has some quite complex implications for competition in the retail sector. Companies have an obligation to fight on price, while pandering to consumers’ self-image of being demanding on quality. It’s is a challenge that will sort the wheat from the chaff, but my betting is that it is the discounters which will do rather better than those who are on a drive for quality. So long as consumer spending stays as slack as it currently is, the only game in town will be price.

But that only explains what is happening – it goes no way towards explaining why it is happening. We are still faced with the conundrum of an economy in good shape and a retail sector that patently isn’t.

My own theory is that we underestimate the effect of the broader corporate sector at our peril. The fact is that while the economy in general is faring well, corporate Britain is not growing more profitable.

In this regard, the latest news from the Confederation of British Industry (CBI) is significant. While there is nothing phantom about the recession in British manufacturing, the CBI reports that prospects are looking brighter. Almost a third of manufacturing companies say they expect manufacturing output to rise by the end of September.

But this conceals are far duller picture for profitability. Corporate profits are expected to fall in real terms by 0.1 per cent this year and to grow by only 1.1 per cent during 2000. Meanwhile, first quarter GDP figures reveal that corporate profits fell by 9.4 per cent in the first quarter. British industry isn’t making any money.

Top-line growth for much of corporate Britain has undergone a freeze over recent years and profits have largely been pushed ahead by rationalisation and other such cost-cutting activities. That can’t last forever.

Because of what to all intents and purposes looks like a brisk economy, with wages rising and raw-material costs edging up, many companies are caught between a rock and a hard place. They have to meet the demands of competition, but are unable to create any real wealth.

The CBI’s report makes for gloomy reading. And it’s not just at the shareholder level that the effects are felt. There is a cascade principle at work here – companies are not making the margins they should and, consequently, their staff are not making the money they should.

That has both a practical and a psychological effect. The practical effect is that consumer spending is going to be squeezed simply because the disposable incomes are not there. The psychological effect is that consumers are going to be cautious because they don’t feel they are in a prosperous economy.

So the retail sector should stop looking for a return of consumer confidence to drive business. The CBI’s statistics demonstrate that business needs to be the driver of consumer confidence.

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