Core retail sales yet to reach bottom

ANALYSIS:Erratic trends and volatility in the motor sector make long-term prediction hazardous

RETAIL SALES, in cash terms, began to fall in late 2007 and have contracted by roughly 20 per cent since then. This puts them back at levels last seen in 2004, reflecting both price and volume falls.

At that time, employment in the broad wholesale and retail sector was about 260,000. It peaked at almost 315,000 in the first quarter of 2008 but had fallen back to 270,000 by the third quarter of 2009, the most recent period for which we have data.

Retail employment is likely to have fallen further in the meantime, and, indeed, has more to go if forecasts for 2010 are realised.

Retail sales are an important indicator of the health of the economy. They account for roughly half of all consumer spending. The other half is spent on services. Generally speaking, when times are tough, spending on goods suffers more than spending on services.

For example, very few have changed their car, the most expensive good one can buy, recently but most people continue to get their hair cut regularly - a classic example of a service.

When we get the CSO's first cut at consumer spending for the final quarter of 2009 - and this will not happen until late March - it is likely that the fall in total spending will be well below the retail figure. Consumer spending, in turn, accounts for about 60 per cent of GNP so it is critical to the state of the economy. The other main bits are exports and investment. Whatever about exports, it is unlikely that investment will recover anytime soon. The monthly retail sales figures tend to be quite erratic so it is best to look at the trend rather than get hung up on any particular month.

December turned out to be poor but it may well have been a month of two halves. Remember the pre-Christmas reports were quite positive. However, there may have been an offset later as the weather began to deteriorate.

The longer-term trend is shown in the accompanying chart which distinguishes between total and core retail sales, the latter excluding spending on the more volatile motors component.

The trend in total sales has been dramatically affected by car sales. These were weak in the first half of 2008 but jumped in July when the tax regime changed in favour of low-emission cars, only to plunge again in January 2009 when confidence was low. After January, sales of cars rose in each of the next 11 months, rising by more in December than in any month since August 2005.

This resulted in a recovery in total sales which is more apparent than real.

When motors are stripped out, core retail sales continued to fall throughout 2009. With most forecasts for consumer spending in 2010 clearly in negative territory, it is likely that we have yet to see the bottom for core retail sales. Motors, too, will have a tough time as the 5 per cent rise in January new car sales was off an exceptionally low 2009 base, so will be hard to maintain.