Public sector job cuts, the VAT rise and possible interest rate hikes mean consumer confidence will remain jittery this year, but Easter could be retail’s reprieve

Why are we talking about this now?

The new year dawns with some uncertainty. Ongoing jitters about economic recovery and job losses continue to take a toll. The VAT rise this week will reinforce in consumers’ minds their changed circumstances and diminished spending power, threatening to undermine sentiment.

Pam Armstrong, consumer products and retail managing director at market research agency GfK NOP, says: “We are yet to see the full effect of the spending review. Public sector job cuts are expected and the political situation is still up in the air.”

How does confidence stand at present?

Consumer attitudes about the year ahead are bleak according to GfK NOP’s Consumer Confidence Index in December.

The measurement of confidence in personal finances for the next 12 months decreased one point from November’s figure to -8 and was down 11 points year on year. Attitudes about the general economic outlook in the next year fell one point from November to -23 and declined 17 points compared with December 2009.

What are potential trigger points that could have an impact?

An interest rate hike is forecast during 2011 by the CBI. Armstrong believes even a small increase could unnerve consumers. Higher-than-expected inflation could also further erode disposable incomes and perpetuate the cautious approach to spending.

However, Armstrong thinks confidence levels will follow a similar pattern to 2010, with no dramatic peaks or troughs. Confidence may creep up at Easter, which falls close to the royal wedding and that may improve the feel-good factor. “Easter could be the new Christmas for retail,” says Armstrong.

How can retailers manage volatile confidence levels?

Retail Week Knowledge Bank consultant Robert Clark believes stock levels must be kept tight because retailers cannot run the risk of having excess stock.

Promotions will be critical as retailers compete hard against each other. “Offers are vital to increase footfall. Retailers need to be aware of their competition,” says Clark.

Retailers must also be clear about their strategies.”Two retailers that did well last year come from opposite ends of the spectrum but have both benefitted from having a clear strategy. John Lewis and Poundland have different propositions but it’s clear to consumers what they represent and they trust this,” says Armstrong.