Forecasting the nature and shape of demand is always challenging because the consumer has, to a significant degree, the freedom to totally ignore supply if they want to.
Against that background come the apparently gravity-defying July retail sales numbers - the best since February and way ahead of expectations. Don’t be fooled.
We live in a world in which the actual numbers (actual spend for example) have become eclipsed by an obsession with shorthand proxies: year-on-year comparatives and like-for-likes.
Because July 2009 was weak it only took a slightly less awful July this year to produce an apparently good growth figure. For exactly the same reason, the next five months’ numbers to December are unlikely to repeat this feat because the comparatives for 2009 were actually relatively strong.
Now you may wonder why the 2009 figures were so good. It’s the comparatives again: 2008 was dire. In the wake of Lehman Brothers’ collapse retail sales were hit immediately. So half-decent sales figures the following year were flattered, and so it goes on.
Our expectations of the shape of demand for the rest of the year need to be managed. While the July numbers were flattering, the Government’s economic strategy has yet to really impact the consumer economy.
Once the public sector cuts begin to bite disposable income will reduce and households will have to make economies in spending.
This is all down to timing - it’s when, not if - and I find it hard to see how retail spending can feel very positive for the rest of the year, except perhaps for Christmas.
The impending VAT increase is likely to bring good and bad news for retail trading although the bad will outweigh the good. Some spending is likely to be brought forward from the new year. This will mainly affect big-ticket items but it may induce a ‘buy now before VAT goes up’ mentality and provide a modest fillip in other sectors too.
Retailers have been very cautious in stock management over recent years, wary of being left with January stock eroding margins. They will need to be ready for what may be a different demand pattern this year.
A slight boost to December may compensate to a degree for what will be a tough Christmas. December 2008 was pretty awful and as a result, Christmas trade in 2009 looked strong. So this year, the comparatives are very demanding indeed.
Next year and in much of 2012 too, demand will weaken and so too will margins. VAT will top-slice some of that demand: with smaller household budgets the consumer will not easily find an extra 2.5 percentage points.
Meanwhile, non-food producer prices have been trending up and the fall in food selling prices has come to an end. While selling price inflation can make day-to-day business management easier in some ways, it is an unwelcome additional pressure on what will be increasingly constrained household budgets.
Richard Hyman strategic adviser, Deloitte