Economy may need retail therapy
Northern Ireland retail has avoided the worst of the recession by attracting trade from the south. However, according to some economists this is set to fall in 2010
Retailing and wholesaling are a central part of our economy, contributing “almost 13% of Northern Ireland’s output and almost 15% of all local employee jobs”, stressed finance minister Sammy Wilson in a speech this month.
But there are major disagreements about whether the sector will continue to thrive and calls for the Executive to take action to protect independent retailers.
Northern Bank's chief economist Angela McGowan is one of the optimists, believing that the retail sector remains strong. She points to Christmas trade that was 50% up in some stores compared to a year before and a maintained price advantage in Northern Ireland compared to the South that generates substantial cross-border trade.
“In 2008 the National Consumer Agency in the Republic of Ireland found that branded goods in the major supermarket chains were on average 31% more expensive in the Republic relative to the North,” said Ms McGowan.
“Although prices are falling south of the border — overall prices fell 3.2% in February compared to one year earlier and food prices fell by 8% — there is still a considerable distance to go before we see like-for-like prices in the two regions.
“Higher VAT in the Republic — 21.5% — and higher wages — reported to be 33% higher for store managers in the Republic — have served to keep prices in the North more competitive. But it is primarily the favourable exchange rate that has amplified cross-border trade since mid-2008.
“As long as sterling remains weak against the euro, and it is unlikely to strengthen significantly in the short to medium term, cross-border shopping will contribute approximately 0.5% to Northern Ireland’s economic output.”
While Northern Bank expects there to be a reduction in cross-border trade, it believes retail will grow this year.
“Assuming that Northern |Ireland’s economic recovery continues to stay on track, the outlook for the local retail sector is good, |expansion is expected, albeit at a modest rate,” said Ms McGowan.
But Richard Ramsey, chief economist of Ulster Bank, takes a less sanguine view.
He believes that cross-border trade has, until now, insulated retail here from the full impact of the recession.
“Within the context of deflation in the Republic and a weakening euro — or alternatively strengthening sterling — this stimulus will recede in 2010,” he said.
Mr Ramsey also believes that financial pressures on consumers, such as rates and rising VAT, will cause domestic demand to fall, damaging retailers.
“The retail and public sectors will bear the brunt of NI's service sector job losses in 2010 and 2011,” said Mr Ramsey.
“While the large UK retail multiples are expected to continue to unveil further job announcements this year, Northern Ireland’s overall level of retail employment will continue to fall. Essentially, Northern Ireland’s retail sector has become larger than its economic fundamentals can support in recent years. Therefore a notable re-adjustment is set to occur over the next couple of years.”
Esmond Birnie, chief economist at PricewaterhouseCoopers, takes a similar view.
“In terms of cross-border from the Republic, whilst there will still be some growth in 2010, there are good reasons to expect less than in 2009,” he said.
“In overall terms, we expect the cross-border retail trade to continue, albeit less strongly, during 2010. However, we think the euro will weaken in second half of the year and this, combined with the effects of December 09 Dublin Budget in narrowing some of the RoI indirect tax disadvantage, may contribute to a less frantic cross-border shopping experience.
“Outside the border areas, we believe that the Northern Ireland retail market, particularly as regards the multiples, must be heading towards saturation; particularly given the significantly increased retail growth in Belfast metro in 2004 to 2008, where investment — as measured in additional square footage — significantly moved ahead of both population growth and historic spending.”
Donald McFetridge, a lecturer in retailing at the University of Ulster, takes a middle view, believing that cross-border trade will “dwindle a bit”, but is also confident that “Belfast will continue to do reasonably well”.
He explains: “There’s more in Belfast than there was 24 months ago, for example Ikea. It's also seen now as attractive to people from across the water, as a weekend destination.”
In terms of overall demand, Mr McFetridge suggests this will depend on what happens in the Budget tomorrow and any tax rises imposed after the General Election, which is due by early May.
“Towards the end of the year I think things will improve significantly,” he said. “Over the next six months I don't see any major change in retail spending. I think it will be autumn before we will see any significant improvement.”
But he predicts that mid-market retailers will remain under pressure, with value and top end retailers best positioned to do well.
The retail expert warns that the ‘store wars’ between Tesco, Sainsbury’s and Asda for market share are more likely to displace existing trade, rather than add to total retail spend.
“We have reached supermarket saturation,” he said. “Because things are getting better politically doesn't mean we are going to eat more.”
He also worries whether independent retailers, in particular, can do well unless the shopping centres of towns and cities are made more distinctive and better able to entice people away from out-of-town destinations.
He cites Ballymena and Armagh as places that are doing this well, allowing independent retailers to potentially benefit from their location.
The Londonderry Chamber of Commerce likewise stresses planned improvements to the city as part of a local strategy to improve the retailing environment.
“In Derry we remain optimistic about the future,” said acting chief executive Sinead McLaughlin. “We are currently regenerating our city centre — investing heavily in improved public realm, investing in our access routes, investing in our built heritage. These are just some of the enabling factors that |we believe will give the private sector confidence to invest in the retail sector.”
Yet there are fears among many town and city centre retailers across Northern Ireland about the impact of proposed additional investment in out-of-town shopping centres, such as the several hundred |million pound schemes recently proposed by the Orana Group in the north west of the province.
Glyn Roberts, chief executive of the Northern Ireland Independent Retail Trade Association, explains: “In Derry alone seven retailers have closed in recent weeks. Some retailers just can't survive. We have |concerns about the Orana developments for Derry and Omagh and the impact on those town |centres.
“There are 12 applications pending [for planning permission for new retail developments], mostly by Tesco and Asda, that threaten towns. That is something the Assembly should get right to protect and enhance the town centres. That would take the pressure off recession-hit retailers.”