Jeremy Warner's Outlook: When a retail slump doesn't spell disaster

Davos opportunity
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The Independent Online

In a speech this week, Mervyn King, Governor of the Bank of England, said that it was foolish to put much weight on any one month's figures, especially at Christmas. With this warning ringing in my ears, I'm none the less going to use yesterday's dire retail sales figures for December to try to make some weighty observations about the present state of the economy.

In a speech this week, Mervyn King, Governor of the Bank of England, said that it was foolish to put much weight on any one month's figures, especially at Christmas. With this warning ringing in my ears, I'm none the less going to use yesterday's dire retail sales figures for December to try to make some weighty observations about the present state of the economy.

The first point to be made is that the numbers are not as bad as they seem. The fall of 1 per cent that the headlines will dwell on, apparently making this the worst December for at least 23 years, is actually an almost wholly meaningless number, for this is the Office for National Statistics' seasonally adjusted figure. In fact, retail sales were in nominal terms 3.2 per cent higher than the same month a year earlier and 17 per cent up on November. The ONS derives its more gloomy, seasonally adjusted figure from the fact that sales usually rise by at least 18 per cent between November and December. Indeed the rise in sales between November and December was the lowest since records began in 1961.

Nor is the big number for retail sales the whole picture. Within retail sales, internet sales were rising at a rate of knots. This is admittedly still a relatively small part of market, but the distress being felt on the high street is to some extent being caused by a structural change in spending behaviour, rather than an outright cutback in spending. More and more of us are doing our shopping from the comfort of our homes. What's more, retail sales are just a part of household spending, or about 40 per cent, so they don't necessarily reflect what's happening to overall demand.

It's more than possible that we have simply been spending our money on other things - holidays, going out, or even just getting our hair cut. We are not going to know what's happening to total consumption for quite a while yet. All the same, the presumption has to be that consumption growth was indeed much weaker in December than its been in a long time. The most obvious explanation for this is that higher interest rates are doing exactly what the Bank of England intended them to do, which is causing people to tighten their belts, spend less and save more.

Yet we may also be seeing the beginnings of a more confusing phenomenon. One of the main reasons inflation is so low is that import prices are falling. The cost of domestically produced goods and services is by contrast rising, strongly in some cases. However, when it comes to big-ticket consumer durables, the great bulk is imported and their prices are generally falling, many of them precipitously. The cost of a desktop computer, for instance, has fallen by at least 20 per cent over the past year, the result of what Klaus Schwab, chairman of the World Economic Forum, has dubbed the "Asiatisation" of the world economy.

This, in combination with extraordinarily rapid rates of product obsolescence, especially in consumer electronics, may be causing people to hold back on their spending. There's no point in buying something today that you know you will be able to buy more cheaply tomorrow. This is regrettably one of the consequences of price deflation, and has been a leading cause of Japan's more than ten year long economic malaise. If prices are falling, it makes more sense to save than to spend, never mind the fact that one day we'll all be dead. The result is that demand falls, further adding to the downward pressure on prices.

It's most unlikely that we are about to enter anything remotely comparable to Japan's more generalised price deflation, but there may be a bit of the deflationary effect on demand going on at the moment. In the run-up to Christmas, consumers held off on their spending in anticipation of the sort of Christmas "spectaculars" that Marks & Spencer held, when prices were reduced by 20 per cent for a day. When not many of these materialised, they held off again in preparation for the new year sales. And so on and so forth. Consumers are becoming more savvy and discerning. They are also buying more abroad. For instance, many of the British purchases of iPods this Christmas would have been through friends who bought them in the US and shipped them back. So on the level he meant it, Mr King is right about not reading too much into a single month's figures. Some powerful new influences are beginning to affect inflation and demand and it is not yet clear how monetary policy should respond.

Davos opportunity

"Asiatisation" is to be one of the big themes at this year's annual meeting of the World Economic Forum, which gets under way in its usual home, the Swiss Alpine resort of Davos, on Wednesday. An impressive array of Chinese political and business leaders has been lined up to attend the meeting, and since the Chinese development story and its effect on the rest of the world is what everyone has been talking about for the past two years, they ought to be in hot demand.

Perhaps regrettably, we can only see the world as it is and has been, not as it will be, so despite Davos's agenda setting pretensions, and the enormous wealth, influence and collective intellect of its participants, it tends to be a quite backward-looking event. The mood at Davos is as accurate a barometer as any of the state of global business and political confidence, but because events always surprise, it's rarely much of a guide to the future.

Recent events have none the less conspired to give the Davos agenda an extra importance. I'm talking, of course, about the tsunami and the great outpouring of public sympathy and international action it has prompted. It usually takes a terrible event to bring out the best in people, and so it is proving with the tsunami, which has served as a wake-up call for the problems of the Third and developing world. There are more initiatives now under way than you can shake a stick at, yet the test will be whether anything becomes of them.

The star turn is Tony Blair, who wants to talk about how Britain will use its chairmanship of the G8 to promote poverty reduction and action on climate change. This latter agenda may seem a bit rich, as Britain has just applied, unsuccessfully, for a larger quota under the European Union's emissions trading scheme. Even so, the need for international co-operation is plain enough. It's only a shame that his friend, George W Bush, busy in America on his state of union address, doesn't seem to agree.

Then there's Gordon Brown, whose visit to the snow covered slopes is carefully timed not to coincide with Mr Blair's. The Chancellor arrives later to talk about - well, probably much the same thing. For most business people at the meeting, this is not an event for solving the world's problems, but rather it is the world's premier, deluxe, five-starnetworking opportunity. For them, Davos is about meeting suppliers and customers, existing and potential, setting up deals, buying and selling businesses, and reinvigorating the contacts book. And if you can go home feeling that little bit better about the world you live in, basking in the international reconciliation you've just witnessed, even if it lasts only a nanosecond, so much the better.

Davos is one of the more eccentric events in the international calendar. Nobody really knows why it works, but work it does, both at the commercial level of persuading enough business leaders to pay the necessary sum to finance it, and in terms of its aim of creating a collaborate framework among world leaders - political, business, religious and cultural - to address global issues. Whether any of the business leaders remember the commitments they've made in the thin Alpine air to good corporate citizenship once they've returned to the everyday task of improving the bottom line is open to question. But with the world economy having just recorded its best growth in more than 30 years, the opportunity for generalised improvement has never been greater. It's an opportunity which must not be missed.