This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
It’s going to be a tough Christmas for high-street shops – but maybe not so tough for restaurants, hotels, airlines and other parts of the economy.
The past few days have been full of gloom. The OECD has just forecast that the Budget will keep inflation and interest rates higher for longer. The markets think there is little chance of a cut in interest rates when the Bank of England’s monetary policy committee meets later in December. Retail sales are falling and the British Retail Sales Consortium is pessimistic about the holiday season.
We are still getting news about the volume of goods bought on Black Friday and Cyber Monday, and early estimates are reasonably positive. But since up to four-fifths of the items bought get returned, it is not at all clear that people are really spending more than they usually do. Besides, sales now may merely mean fewer sales once Christmas gets going, as people simply buy their presents early.
But in every cloud there is a silver lining – and it is that while people are cautious about spending money on goods, they seem to be more positive about spending money on services.
Back in business
For example, hotel occupancy levels are higher in 2024 than last year. Restaurants have taken a knock from the Budget but the number of licensed premises is actually higher than the previous year. Airlines are back in business, with Heathrow expecting a record 83.8 million passengers this year. That’s up from the previous peak of 80.9 million in 2019.
You can catch a feeling for this shift from buying goods to buying services in other ways. A lot of the offers on Black Friday were for hotels and holidays rather than consumer goods. Shops on high streets that close often reopen as coffee bars, places online workers can use as an informal office.
This shift was happening even before the pandemic – there was an estimate that by 2030 there will be more coffee shops than pubs in the UK – but anecdotally the shift has sped up since then.
Prospects for the economy
As for shops, well, the inexorable shift to buying online continues steadily, with the proportion of retail sales bought online creeping up by nearly one percentage point a year. The latest figure, for October, was that 27.6 per cent of retail sales were online. That is up from 26.7 per cent a year earlier, and 25.9 per cent in October 2022.
Of course, online sales shot up during the pandemic, hitting a peak of nearly 38 per cent in January 2021, but now we’re back to reasonable stability the message for the high street remains ominous. It must continue to adapt to the rather different way we live now.
So what happens next? There are four things to look for over the Christmas season that will tell us something about prospects for the economy next year.
The first will be inflation. That is not simply a matter of the monthly consumer price index, which the markets expect will increase from 2.3 per cent in October, but more the feeling in the shops. Are retailers really trying to hold down prices, or are they holding them up as their projected costs climb next year?
Hostile words
The second will be the response to the Budget. One really big question – and we don’t know the answer to it at all – is how much of the increased tax and other changes in the Budget will be passed on in prices, and how much in reductions to staffing and other cost-cutting measures. We should start to have a sense of this by the end of the year. There have been a lot of hostile words about it, but what matters is what businesses actually do, rather than what they say. And what businesses do will in fair measure be influenced by how good a Christmas season it turns out to be.
Third, there is the housing market. It has held up very well so far, with prices at a record level and up 3.9 per cent on the Halifax index year-on-year. The Christmas period is not in itself a home-buying time, but it is one for planning about the future.
The question here is whether the market is going soft because of higher-than-expected interest rates. So any reports from estate agents about, for example, the level of new enquiries that confirm or counter those fears will give an important signal for the economy in the year ahead.
And finally, there is this shift from goods to services. It is something we are all aware of and it is huge: people wanting experiences rather than stuff. Reports from pubs and restaurants will give some clues. Is it easy to get a table? What are the office parties like? What is the mood in the travel companies, for the break is one of the key moments in the year when people plan their future holidays?
So there is a not-very-festive season looming – but an interesting one, and for some parts of the economy at least, the prospect of some decent weeks ahead.
Need to know
The shift from goods to services is one of those huge changes in the way we live that is remarkably under-researched. We know a lot about the shift to online sales noted above, and we are learning a lot about the shift to home-working. There is a good, if somewhat worrying analysis here.
Did you know that more than one-third of people working from home fake their productivity? Or that more than 80 per cent watch television during their working hours?
You can see why private sector employers at least are so eager to get people back into the office, and I am afraid why home-working looks like being a big drag on public sector performance.
But the shift to services? Not a lot is documented. There was a reverse shift during the pandemic: because we couldn’t buy services, we bought goods instead (and saved a lot too). Now that has almost completely unwound – I say almost because services such as takeaway meals seem to have continued to grow versus seated dining. But the general long-term pattern seems simply to be one of those accepted features of life.
The best study I have found is this one, from the US division of the international consultants RSM. These are American data but I don’t think the numbers would be very different here in the UK, or in the rest of the developed world. The key point is that goods prior to the pandemic accounted for about 31 per cent of household spending, with services at 69 per cent. This shifted to a 35/65 split in early 2022, when restrictions were still in place, and I guess that it would be back to pre-pandemic levels now but I haven’t got more recent data.
In any case, services are such a bundle of different activities that the 31/69 split is not very helpful. It conceals the changes taking place within the service sector. Spending on kids’ college fees is very different from spending on takeaways and Ubers. So a bit of digging is needed and I will try and do that in a future article.
Meanwhile, the thing to do is to look around and see the way in which the economy is adapting. My local high street has made a radical shift towards restaurants, bars (nail as well as booze), wellness studios and the like. The physical shops that remain do include a supermarket, many convenience stores, chemists, hardware outlets, and a bit off the main thoroughfare, an M&S, a Sainsbury’s and a Waitrose. So it is adapting in an impressive way. But this is inner London. Go further out and things are tougher.
I hope it is a reasonable Christmas for both services and goods retailers – use them or lose them – but I do worry about rising costs next year.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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