When the payouts by banks for misselling Payment Protection Insurance dry up the high street could be hit by a spending drought.
Retailers including John Lewis, Currys PC World and Argos all hailed the previous six months as one of the strongest in recent years for sales of electricals and white goods, while retail sales according to the Office for National Statistics are also growing at record rates.
However, experts are suggesting the boost in spending is down, in part, to the extra £12.5bn in the economy paid out by banks for misselling Payment Protection Insurance and this could soon dry up. They are warning that with 70 per cent of payments already made, the speed of growth in retail could be hit as the payouts slow and wages continue to rise below inflation.
Paul Turner-Mitchell, a retail expert and co-author of the Grimsey Review, said PPI payments in the first 10 months of last year was around £4.7bn, while the Office for National Statistics’ Retail Sales Index found real term spending was up £1.03bn. He explained: “With the average payout pushing £3,000, undoubtedly, the compensation is providing some respite for households where real income has fallen. By definition these are usually lower income families.”
However, he warned: “Given that 70 per cent of PPI payments have now been awarded and paid to claimants, consumer spending will soon be losing a powerful stimulus.”
Matthew McEachran, retail analyst at N+1 Singer, agreed and suggested around £5bn is left to distribute to claimants, which he expects to be spent this year.
He said: “Since autumn 2012 we have been flagging the benefits of PPI windfalls on expenditure. The magnitude of the payouts, and the likely bias towards middle-aged consumers in mid-to-low socio-economic groupings, led us to believe there would be a high propensity for the money to be spent. The fact of the matter, though, is that the gross payouts will be around £2.25bn less in 2014 versus 2013.”
Along with increased spending in electricals, people also appear to have an increased appetite for cars and holidays.
Hassan Jiva, director at specialist law firm MRH Solicitors, who currently has around 20,000 outstanding claims for PPI misselling on his books worth £60m, said: “There is no doubt the compensation is fuelling consumer spending from what our clients are telling us and that spend ranges from white goods to new kitchens to family holidays.”
Over the last few weeks, retailers have been revealing a relatively buoyant Christmas period, with customers keen particularly on electricals.
Seb James, chief executive of Dixons – owner of Currys PC World – said earlier this month that white goods sold better than expected and one TV was sold every seven seconds on Boxing Day.
While over at Argos, Terry Duddy, chief executive of parent company Home Retail Group, said that sales were up 3.8 per cent over Christmas and electronics was its best-selling division.
However, Nick Hood, business risk analyst at Company Watch, warned: “They now face a long haul until Christmas 2014 comes to their rescue. This will be hard enough for some, without a sudden loss of the artificial boost to consumer spending from PPI compensation.”