The problems in the Eurozone are threatening the recovery of the global economy.
Why are we talking about them now?
What started with Greece has spread to other countries.The markets assume that Greece will have to write down its massive debt by at least half, and some think the Portuguese, Irish and even Spanish and Italian governments may eventually follow suit.
Some of these debts are held by the European banks, increasingly by the European Central Bank. While some countries, such as Germany, can afford to rescue its banks, others may not. Ultimately, Germany and other less indebted countries may have to bear much of the rescuing of the Eurozone’s banks and its weaker governments.
Why does this matter to UK retailers?
Many UK retailers are reaching out overseas for growth because the economic climate in their domestic market gives them little room for growth. Kingfisher, for example, reported last week that adjusted pre-tax profit soared 24% to £439m in the 26 weeks to July 30, with two thirds of profit coming from outside the UK. Retail profits in France were up 23.9% and retail profits at its other international business – which includes Poland, Spain, Turkey and Germany – were up 24.7%.
Is the Eurozone situation likely to affect investor views?
Arden Partners analyst Nick Bubb pointed out that investors used to like retailers with relatively little UK exposure and lots of global exposure, but now any form of Eurozone exposure seems to be shunned as well. He said French retailer Kesa pointed to deteriorating economic conditions in France, Italy and Spain.
What can UK retailers do about any deteriorating conditions?
As with the UK, retailers should get their businesses in order rather than rely on growth in the general markets. Last week Kingfisher chief executive Ian Cheshire said economic uncertainty throughout Europe was likely to hit consumer confidence, meaning conditions will remain challenging for retailers. However, he said Kingfisher’s plans already assumed little help from its markets and it would continue to perform well due to its well-established programme of self-help initiatives, international scale and breadth. Other retailers will try to maintain growth from their own actions rather than rely on the general economic climate.