Last week, the most important piece of news about the UK economy went largely unnoticed. As our elected representatives fell over each other to denounce a 585-page document virtually none of them had read, retail sales growth for the 12 months to October was reported on Thursday. Coming in at 2.2% – a full percentage point lower than expectations – it added another data point to a worrying trend for the sector.
Such a slowdown would be disappointing for a sector in rude health. For retailers, it is more serious. A string of collapses over the last year has underscored the many structural issues facing the sector. Some of these – rising rents, rising input costs and above-inflation wage growth – are down to market forces beyond the government’s control. But others are not. The UK’s regressive business rates system costs retailers around £8 billion per year. Sainsbury’s alone pays £500 million a year in business rates, roughly five times its corporation tax bill. To add insult to injury, online retailers largely avoid the tax, which is linked to the amount of high street real estate a company owns rather than its revenue. Combine this with many online retailers’ wholescale evasion of VAT through selling into the UK from overseas entities, and it is little wonder that the high street is losing the battle.
The gravity of these issues is borne out by retail property prices. Companies with the greatest exposure to property – the likes of Debenhams, Marks & Spencer and Pets at Home – are also among the most heavily shorted stocks in the UK. Meanwhile, Real Estate Investment Trusts (“REITs”) with large holdings in shopping centres face a market convinced that the latest fall in valuations is just the beginning. Land Securities Group, a REIT with 25% of its assets in retail premises, currently trades at a discount of 37% to its net asset value. In other words, investors think the properties it owns are worth less than two-thirds their current valuations. Segro, on the other hand, which owns and develops the vast warehouses required by online retailers, trades at a 5% premium.
The shift from high street to online retailers matters because they do not make the same contribution to the economy. High street retailers may understandably complain about excessive business rates, but they pay them. As seems to be the case with tax in general, many online retailers manage not to. So continued pain on the high street will eventually feed through to government income. At the same time, low unemployment figures are cold comfort for those whose “employment” takes the form of a precarious and easily terminated contract. And once more, ultimately it is the public purse that will pick up the tab.
Supposedly, the Brexit debate that reached fever-pitch last week is predominantly about the UK’s ability to choose its own economic future. It is therefore unfortunate that the shouting on both sides is preventing much discussion of that future, at least in so far as it applies to issues less abstract than sovereignty and backstops. As so often in the past, if you want to know what’s going on in the UK economy, it’s time to ignore the noise in Westminster – and look at the high street.
Upcoming economic data
After a quiet start to the week, UK Public Sector Net Borrowing figures will be released on Wednesday – expected at £5.6bn, up from £3.3bn last month. On Friday, Germany will report its final Q3 GDP growth figure (no change expected from initial estimate of 1.1%), and the Eurozone PMI numbers will be released. Consensus expectations are 52.0 for Manufacturing (no change from last month), 53.6 for Services (slightly down from 53.7 last month) and 53.0 in composite.
For more information, please contact Joshua Roberts, Associate at JCRA, at firstname.lastname@example.org.