We’re expecting a rise in the Bank of England’s base lending rate to run concurrently with the publication of this issue. By the time you read this, we should know whether the Monetary Policy Committee (MPC) has gone for a quarter-point rise to 5.75 per cent, or a beefy half-point hike to six per cent.
At the time of writing, I expect – along with most City observers – two quarter-point rises this and next month. But the details of the timing don’t really matter. What does matter – a lot – is that there is almost universal acceptance that we’re in an economic environment where base rates must rise. They are likely to hit 6.5 per cent, before starting to fall again.
The conventional wisdom, which can be expected to prevail at the MPC, is that household wealth is robust, consumer demand consequently high – manifesting itself at the high-street sales – and that house price inflation last year indicates a broader inflationary urge in the economy that must be quelled. So interest rates must rise.
I say the principle is almost accepted because there are those, particularly in the retail sector, who could do with a little interest rate respite in order to kick-start some real trading in the new century. It’s all very well to parrot the old mantra that we mustn’t return to the wicked ways of the boom-and-bust Eighties (now the decade before last and decreasingly analogous of today’s situation), but frankly there are high-street retailers which could do with a little boom to pull them away from going bust.
Boom-and-bust may be the enemy of a sensibly run economy, but bust-and-bust is not a sensible alternative. I strongly suspect the trading figures we hear from the retail sector for the Christmas period will tell a rather different story to the indicators I have listed.
Marks & Spencer’s troubles are widely acknowledged to be self-inflicted: inept product development and sourcing, poor management succession and the like. But M&S is like Sir Cliff Richard – the chattering classes may talk them down but when it comes to sales performance “Middle England” votes with its purses. Hence Cliff’s God-awful chant made it to number one in the pop charts just before Christmas, while M&S will reflect what Christmas spending was really like in Britain’s high streets.
M&S makes its Christmas trading statement this week. It is widely believed to be dismal. Again, you may know the detail by the time you read this, but my expectation is that sales volumes will be 15 per cent lower.
As a retail bellwether, M&S, for all its internal troubles, is not to be ignored. To do so would be to patronise its continuing ability to reflect Britain’s purchasing patterns – as we continue to patronise Cliff in the face of similar power.
For all the talk of booming domestic wealth, the retail sector continues to struggle. Sure, the crowds at the sales were impressive, but retail health can’t be judged by narrowed margins alone.
So how do you explain a booming consumer economy and wounded retail sector? Because in one significant regard M&S is not a bellwether. Clothes and food retailers, as well as department stores and mail-order players, will eye M&S’ statement nervously because the boom continues to be driven significantly – and artificially – by the telecoms and IT sectors.
There were reports last week that nearly a quarter of the population is now in possession of a mobile phone. It was the most popular, if corniest, of Christmas presents. Likewise, households continue to tool up with computer kits from the likes of PC World and Tiny. These two industries feed off each other – to be online is to be in telecoms, and vice versa.
And there is further, plump market share to penetrate, with mobiles usurping land-lines and online retailing still in its infancy.
Telecoms and IT not only represent a massive trading bubble in the retail sector, but have contributed to an extraordinary distortion of the stock market indices ahead of Christmas. The inflation of the FTSE 100 index in December, when it nearly tested the 7,000 mark, was almost entirely due to a handful of telecoms and IT stocks. The orderly correction of equity markets in the early days of this year, with record FTSE one-day falls that only served to return markets to pre-December levels, is a reflection of some of the steam being taken out of these most hubristic of sectors, especially the Internet division.
Equities took off again in the early part of this week, and index tracker funds have to take a good proportion of the blame for this inflation. They purport to represent the entire index with their investments, but in effect they are pushing the price of telecoms and IT stocks unreasonably.
The knock-on effect of consumer and investment booms in these narrow sectors is insidious. It gives an entirely false impression of the state of the retail sector as a whole. And if it suffers as a result of a misguided interest rate policy, ultimately we’ll all suffer. I hope the Bank of England sees through this phoney consumer boom.
George Pitcher is a partner of issue management consultancy Luther Pendragon