Belfast Telegraph

Friday 1 August 2014

Christmas retail slump has made deflation fears worse

I don't know about you, but the shops look very empty to me. It is certainly a lot different from Christmas a few years ago, when the Gardai had to be called to clear Dublin's Henry Street for fear someone would be killed in the crush.

Last week's retail sales figures from the Republic’s Central Statistics Office (CSO) go only as far as October, and they were not good.

There is not much sign that November was any better, or that this Christmas will be anything but the least merry for retailers in many years.

Even since September, numbers on the live register have grown by 28,000, and sterling has fallen by 10p against the euro.

The fall in retail sales compared with October last year was the biggest since 1984.

Excluding car sales, which tend to be volatile, it was the biggest drop since 1975. That is the startling sign of the scale of the crisis facing the economy.

People normally spend less in bad economic times. Even when they are not worried about their own finances, other people's problems affect their mood.

The surge in cross-border shopping has added to this decline by moving significant amounts of consumer spending outside the State.

Economic ups and down feed upon themselves, which is the main reason they can turn into bubbles and busts.

Consumer spending makes up about two-thirds of economic activity, and keeps more people in work per euro spent than any other activity.

So the kind of falls reported by the CSO add to the economic contraction from the collapsed building industry, the global slump and the inevitable reduction in bank lending. The building and house price slump is playing a major part in the fall in retail sales.

With so few houses being sold, purchases of household goods were 24% down on October last year.

Items such as refrigerators, paints and glass were showing drops of around 17%.

Those housing-related falls probably exaggerate the decline in actual consumer confidence and willingness to spend.

A better one might be the 3% drop in sales of clothing. All these figures are for the amounts sold, not the cost.

The reduction in clothing sales came despite the fact that prices fell 6% during the 12 months.

There will be more bargains to come.

The scale of pre-Christmas sales in the shops seems unprecedented. If things do not pick up, January's clearouts could be even bigger.

Just as unprecedented is the decision by publicans not to pass on the increase in the cost of the pint. With drink sales falling every month of the 12, to be 11% down on 2007, this is hardly surprising.

We can certainly forget inflation as a problem. The CSO figures indicate that the cost of the items covered fell by 2% during the 12 months.

Shops are having to respond to the lack of demand. Analysts believe that the shops themselves will start to go next year, based on their forecasts of a further fall in consumer spending.

The scale of pre-Christmas sales in the shops seems unprecedented. If things do not pick up, January's clearouts could be even bigger

Retail sales account for about half of all consumer spending. The cost of the rest — mostly services — is still going up.

Nevertheless, when cheaper mortgages and fuel are added in, the total cost of living may well fall next year; for the first time since 1946.

From what one hears people saying, “deflation” is a real danger. This happens when consumers postpone purchases because they think prices will fall further.

Obviously, there is already deflation in the housing market. Were it to spread to consumer spending, the effects could be nasty indeed.

Even if a real deflation is avoided, most economists expect consumer spending to fall again next year. It seems clear that the number of houses built will also decline again.

The global slump plus the rapid falls in sterling and the dollar will wreak havoc on exporters.

Putting these together produces the forecasts that output — the production and sale of goods and services — will fall by something like 4%.

The Government has now accepted this forecast and will have to dramatically increase its borrowings as a result.

All of us must recognise that it represents a fall in national income, and therefore in living standards.

In past downturns, such problems have often been hidden by inflation in wages and prices.

This time, prices are not going up and it is vital that wages don't either. With output falling, any wage rises not backed by productivity will have a dramatic effect on costs and employment.

As well as an inevitable fall in living standards, there is also now an inevitable rise in unemployment and emigration.

Government policies, such as the ones to be announced today cannot prevent that happening, and it would be better if everybody admitted the fact.

What they can do, with the backing of the social partners, is keep the losses to a minimum and ensure that Ireland is as well-placed as possible to share in the global recovery, whenever it comes.

One should not exaggerate the gloom.

A 6% fall in living standards overall comes off a 50% increase during the previous ten years.

Unemployment of 10% would be in line with the likely EU average.

If costs are kept down and efficiency improved, those trends could quickly be reversed.

But if we ignore these realities, it could be much worse than that.

Brendan Keenan writes for the Irish Independent

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