With looming public sector cuts and job losses set to hit the North harder than the South, will regional disparities return?

In more affluent times before the banking system collapsed and growth was easier to come by, the once stark North-South divide appeared to have abated as unemployment fell and the whole country prospered.

But the world has changed and now, as the new Government prepares its plans to plug a gaping financial deficit and put the economy on an even keel, there are signs that the North-South divide could be making an unwelcome return.

Some retailers have already noticed a drop in sales hitting their northern stores more sharply. And although the trend has not yet been experienced by all retailers there is growing concern that stores, particularly those in regions dependent on public sector employment, will feel sharply the effect of widely expected public job cuts.

That could have a similar negative impact on consumer confidence and ability to spend as private sector cuts had last year, marring what has been a more positive year so far for much of the high street.

At present the nation is waiting for details of the new Government’s plans but one footwear chief executive is already worried about the impact on his business. He says: “Trade collapsed following the election. Business has been double-digit down in areas - some of our stores are doing half of what they were doing last year. For the moment I’ve put store openings on hold outside of the M25 until we get a clearer picture on consumer confidence post-election.”

Another fashion chief executive said: “There is a definite dip in sales in the north of the country, which I think is because of public sector workers fearing job losses after the election.”

Bellwether retailer John Lewis, despite generating solid sales growth, has experienced a noticeable disparity in sales growth across the country.

A snapshot of last week’s figures showed Bluewater’s sales ahead 38.8% and turnover in Kingston and Milton Keynes up 17.9% and 18% respectively. But at the same time sales in Aberdeen dropped 8.1% in the week and were down 0.8% in Edinburgh and 2.5% in Newcastle.

According to the British Retail Consortium, from February to April like-for-like sales across the industry were ahead 1.6% on last year and up 8.1% in central London. But Scottish retail sales out this week show a 2% fall.

This week the Chancellor of the newly formed Conservative-Liberal Democrat coalition Government, George Osborne, said that an emergency Budget will be unveiled on June 22.

That will be a crucial moment for the new Government and for businesses, which want to see what plans it has to stabilise the economy and, crucially, tackle the country’s debt.

Cancel the debt

Chairman of turnaround and investment firm Better Capital Jon Moulton, who was involved in a swathe of retail sector deals while at private equity firm Alchemy, says it is vital that

the deficit is tackled quickly and the necessary action will have a definite impact on retail sales. “There is a £163bn deficit that no one seems to be doing anything other than stare at,” he says.

Moulton maintains that not only will essential public sector spending cuts result in less disposable income but that the pill will be made more bitter by the Government’s need also to raise income.

He points out that retailers have had a good period and retail sales have also held up well. But what comes next Moulton says will not “just be a North-South divide” but will heavily affect Wales, Northern Ireland and Scotland - all highly dependent on the public sector for employment.

Christine Cross, retail and consumer adviser at PricewaterhouseCoopers, highlights by way of example the main public sector office locations across the country - Edinburgh, Glasgow, Manchester, Leeds, Birmingham, Bristol and Cardiff, as well as London.

But she adds: “In Wales and Northern Ireland more than two thirds of GDP comes from public spending - in London it is a third.”

Although the public sector employs many people in London, the capital and its surrounding region is expected to be cushioned by the other recovering sectors that dominate there.

Cross says she is already picking up regional disparities. “We are certainly seeing a divide across retailers, and that is in food and non-food,” she says. “People are holding back on spending. May trading has been poor - part of that is the weather but it is worrying that food sales have been hit. Premium labels were hit and they had been picking up.”

She believes that a resurgence in homewares sales has started to subside and expects the return of recessionary spending trends, such as childrenswear being a top performer, in some areas outside the south.

One furniture retail finance director has begun to see a regional split in spend “to a degree” but not enough for it to be a big worry yet.

“The impact for us tends to be more location than region specific,” he said. “Stores in the Midlands with remnants of losses from the car manufacturing industry have begun to tighten up.”

Cross adds that other sectors could start to feel regional spending cuts even if they are not doing so already. “Electricals had been buoyed by new competition in the market and TVs ahead of the World Cup - I expect these sales to drop off, particularly in larger domestic appliances.” Young fashion, she believes, will continue to prosper nationally because that customer is sheltered longer by parents.

Some retailers said they have not seen any regional differences yet. One chairman characterised trading as volatile across the country as trading patterns by area swung wildly up and down.

He said that typically generous redundancy terms for public sector employees would likely cushion spending in affected regions, making a stark sales downturn less likely.

And Derek Lovelock, chairman of Oasis and Karen Millen owner Aurora, has not seen a divide yet. He jokes: “The North-South divide for us tends to be more about the weather.”

Land Securities commercial director Ronan Faherty also plays down the idea of a re-emerging North-South divide: “Thankfully it is not what we are seeing. Footfall across shopping centres is growing on last year and regional sectors in particular are holding up. Places like Glasgow, Leeds and Liverpool are still strong.”

But he acknowledges: “I certainly think that when any public sector cuts hit, they will hit consumer behaviour and we would be worried about the impact of that.”

Deloitte strategic adviser Richard Hyman says that other economic factors may come into play that may hit the South hard. “Spending has been held up by low interest rates, which is skewed more in the southeast where there are larger mortgages,” he says.

“What may have a balancing effect over the next 18 months will be interest rate rises. The Government and Bank of England will be keen to keep them low but may not be able to keep control.”

If regional disparities do emerge, Hyman says that could be difficult for retailers to tackle. “Most national retailers operate national pricing but may have to look at a more regional pricing strategy or a more regional approach to promotional strategy,” he says. “What we will see is an intensification of competition with more retailers trying to defend market share,” he predicted.

Last year local high streets felt the downturn deeply and it seems there will be little respite for them if the cuts to public spending are as wide and deep as many believe inevitable.

If and when the impact of job cuts is felt, Faherty believes it will once again hit local high streets with the greatest force. “People will gravitate to regional malls - but it may be the local smaller high streets that feel the real impact,” he says. “Families will go to centres to spend as one, rather than individually on local high streets.”

The new Government’s initiatives to tackle the deficit will not be pretty but will be essential to shore up the economic future of the country. Retailers in London and the Southeast are likely to benefit not only from the breadth of business sectors the region is home to but from the number of tourists drawn to the capital and its environs.

Northern regions, which last year were battered by the loss of jobs across various industrial sectors, are now, it seems, in for a second round of job cuts.

Any new North-South divide may be more restricted to particular areas rather than regions in their entirety, and have not hit stores across the board yet, but it is a growing concern that retailers will not be ignoring as the inevitable cuts begin to bite.