Boots boss Seb James has predicted a recession is on its way, but are his fears of an economic downturn well grounded?
James warned that “storm clouds are gathering” at the launch of the retailer’s new-format store in Covent Garden last month.
“We currently have a fairly unusual political situation,” said James. “I think we’re due a cyclical recession.”
Since he made his statement, the idea that a recession is on its way has gained increasing credence among financial experts.
Some have warned the UK could have entered a technical recession. This week, the National Institute of Economic and Social Research (NIESR) thinktank said there is a one-in-four chance the country is already in a recession.
Dr Garry Young, director of macroeconomic modelling and forecasting at NIESR, said this was because there is a better-than-even chance GDP contracted in the second quarter, and a slightly less-than-even chance it will fall in the third quarter.
A decline in GDP in the second and third quarters would mean the UK is technically in a recession, which is defined as two consecutive quarters of falling GDP.
It is not yet known whether GDP growth fell in the second quarter because the Office for National Statistics has not released its figures for the period – they will come in September – but there is a wider belief that GDP declined.
Richard Lim, chief executive of independent economics research consultancy Retail Economics, said there could have been flat growth or negative growth in the second quarter after stockpiling ahead of the initial March date for Brexit brought forward demand to quarter one and weakened subsequent demand.
Fingers crossed for Q3
Recent grocery figures may not bode well for the prospects of GDP growth in the third quarter, some fear.
Both Kantar and Nielsen found grocery spending shrunk in July. Kantar attributed the decline primarily to seasonal factors, but Nielsen warned “there may well be clouds on the horizon. The drop in sales is also a sign that consumers are starting to change how they spend.”
“The economy is heavily reliant on summer spending,” says KPMG UK head of retail Paul Martin. “If the back-to-school trading period is slow too, we are very likely to see a negative growth number for quarter three.”
Broker Shore Capital also suggested the UK could already be in a recession in a research note at the start of this month.
“We are either in a recession or very close to recession and whether we can wangle our way out of recession remains to be seen,” says Clive Black, head of research at Shore Capital.
“Politics is dominating economics at the moment, so political decisions will have a bearing on what happens economically”
Clive Black, Shore Capital
Black tells Retail Week that even the UK briefly dipping into a technical recession would be damaging for the retail industry because of the further damage it will do to already fragile consumer confidence.
“I imagine a lot of consumers will listen to the radio bulletins and see the rolling headlines with the R-word,” says Black. “There will be a lot of noise around a recession and it will undoubtedly have the potential to set consumer sentiment back another notch or two.”
However, he says the real danger is that the UK enters a more structural recession caused by a chaotic Brexit that lasts six to eight quarters.
Such a scenario would be an “unmitigated disaster” for the retail industry, Black says.
He believes it would “undoubtedly” increase the risk of administrations and compound three years of Brexit uncertainty.
“People start to behave in a way where they are worried about losing their job or are losing their job,” says Black. “You would see the tide of retail activity go out and mid-market discretionary non-food retailers will be particularly penalised. The grocers and essentials retailers would clearly be a little bit more resilient, but frankly, I see very few being immune to such a tidal movement.”
Johnson’s Brexit stance
Others hold a more optimistic view of the current economic outlook. Lim does not believe the UK has already entered a recession and says the “vast majority of economic consultancies do not hold that view”.
Retail Economics has forecast growth of 1.3% in 2019, but that is predicated on a Brexit deal being secured by the end of October.
“We’ve not done forecasts for no deal, but our view is if we have a hard Brexit with no deal at the end of October then it is likely the economy would enter a recession,” says Lim.
That is certainly the view of the Office for Budget Responsibility (OBR), the independent forecasting body.
Earlier this month, an OBR stress test found a no-deal Brexit would result in a year-long recession that would bring a 2% fall in GDP, push unemployment over 5% and cause house prices to fall 10%.
During his leadership campaign, new prime minister Boris Johnson took a hard-line stance on Brexit, promising that a departure from the EU will be secured by October 31, “do or die”.
That has made the chances of a no-deal Brexit more likely because doubt remains whether the EU will be prepared to offer Johnson any further concessions on Theresa May’s withdrawal agreement, or restart negotiations on a new deal before October 31.
With a no-deal Brexit and a subsequent recession increasingly possible, retailers need to prepare as best they can for the consequences.
“If the economy falls into recession and consumers lose confidence this will have a negative impact on discretionary spending,” says Lim. “In previous recessions, we have seen discretionary spending hit hard and it is typically bigger-ticket purchases that face the brunt of that; for example, furniture and flooring and large electricals.”
James has warned the industry needs to be ready for the gathering storm and said Boots will “operate in whatever environment we find ourselves in”.
“The biggest challenge for retailers at the moment is just making sure their business models are fit for purpose for today’s consumerism”
Richard Lim, Retail Economics
Unfortunately, matters are largely out of the hands of businesses and their fortunes are to some extent at the mercy of politicians.
“Politics is dominating economics at the moment, so political decisions will have a bearing on what happens economically,” says Black.
While Black believes a no-deal Brexit would be a disaster for retail, he thinks if Johnson does manage to secure a deal it could jumpstart the economy.
“If we do enter the pre-Christmas period with a runway to some form of agreement with the EU, including a trade deal, business and consumer confidence will absolutely rocket as will the value of sterling,” he says. “Food prices and oil prices will come down, people’s livelihoods and job security will be enhanced and I think the UK economy will probably see a very sharp rebound.”
Black describes the current economic predicament as “binary” because of the two potentially drastic outcomes. On the one hand, is a no-deal Brexit causing economic disaster, and on the other is a sweet release from Brexit paralysis that will lead to a resurgent economy.
Some kind of resolution finally appears to be on the horizon, however.
“At least we have a prime minister that might make a decision now,” says Black. “Whether it is the right decision or wrong decision, who knows?”
More pressing concerns
As the outcome is out of retailers’ hands, Lim believes a recession is unlikely to be the biggest concern of most of them.
“I think the biggest challenge for retailers at the moment is just making sure their business models are fit for purpose for today’s consumerism and all the changes that are happening at pace,” says Lim. “Lots of incumbent retailers have too many stores, too much space and are dealing with inflexible lease structures. These are the pressures they are facing, more so than general economic conditions.”
Regrettably, for some retailers, a recession would likely be the straw that breaks the camel’s back.
“We have already seen even in the current climate a number of retailers under pressure because of the structural changes in the migration towards online and experiences,” says Lim. “If we add into the mix a recession and a real knock to consumer confidence, it is almost inevitable it will push further retailers to the brink.”
As no-deal clouds gather over the UK, the retail industry will be desperate for them to pass by. If they do not, some retailers could be sunk by the storm.
Is Boots boss Seb James right to be worried about a recession?
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Analysis: Is Boots boss Seb James right to be worried about a recession?