Recession looms larger for UK retailers

04 July, 2008

There is a now a strong chance the UK will enter a recession over the next year as the credit crunch squeezes consumer spending, economists believe.

The stark warning follows unexpectedly bad news from Marks & Spencer this week, which reported sales down five per cent and like-for-like food sales down 4.5 per cent in its last quarter.

“We think it is pretty likely the UK will enter a technical recession,” Vicky Redwood, consumer specialist at respected think tank Capital Economics, told OLN. She said rising unemployment as well rising food costs and bills may force consumers to cross luxury items off their shopping lists.

Some drinks industry analysts have warned privately from early this year that recession was on the cards.

Opinions differ on how badly the food and drink industry will be affected. Richard Dodd, of the British Retail Consortium, told OLN: “It’s clear that a lot of retailers are facing a tough time and there’s no real prospect of that changing in the foreseeable future.

“But we are still seeing growth in food and drink, and there is no evidence consumers are cutting back on purchases of alcoholic drinks.”

There is no question that drinks retailers face an uncertain time along with everybody else, however. M&S chairman Sir Stuart Rose said he expected market conditions to “remain difficult” for retailers over the next 12 months. To add to the gloom, a GfK/NOP poll published earlier this week claimed consumer confidence was at its lowest for 18 years.

Capital Economics believes unemployment may rise from five to eight per cent. “We don’t think we’re heading for something quite as bad as the 1990s, when unemployment rose to around 10 per cent, but we will see fairly sharp rises.”

Drinks firms are watching events closely. One source at Pernod Ricard said sales of premium drinks had so far held up well. Both Pernod and Diageo have rejected claims that an economic downturn would impact their premium spirits divisions, though some analysts said this was “a little optimistic”.

What is a recession?

A technical recession is defined as two consecutive quarters of negative economic growth. The UK has grown every quarter since 1992.

Critics of this assessment take a broader view, defining a recession as visible economic decline – such as a fall in retail sales. Sir Stuart Rose said this week: “It’s about how the consumer feels that matters.”

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