Last month, deflation in non-food prices deepened further, with prices 2.5% lower than the same month in 2017. This is the deepest deflation in non-food since August 2016. Food inflation picked up in May to 1.2%, from 1.0% in April. Ambient food inflation also accelerated in May to 1.7%, from 1.2% in April. Fresh food inflation remained unchanged at 0.9% last month.

Helen Dickinson OBE, Chief Executive, British Retail Consortium, said:“Overall shop prices fell again in May as the impact of the pound’s fall following the EU referendum reduces and the challenging retail environment continues to mean retailers must compete on price. While food inflation has increased this month as the weather, oil price and other geo-political factors have influenced global agricultural markets, we expect overall prices to fall in coming months.

“Retailers’ overall sales revenues are under pressure from falling prices and this comes at the same time as business rates and other public policy decisions are pushing up operating costs; leaving retailers squeezed at both ends. The consequences of which have been plain to see. Government and policy makers must do more to address the burden of business rates and help to ease the pressure.”

Mike Watkins, Head of Retailer and Business Insight, Nielsen, said:”Despite a small increase in food prices in recent weeks, shop price inflation remains below the Consumer Price Index and the recent summer weather has lifted food sales. In contrast, we are seeing further deflation in the non-food channel and there has been little momentum in retail sales. With continued increases in crude oil prices now adding further cost to the supply chains and weak demand on the high street, retailers need to be cautious about passing on any price increases over the next few months. The good news is after a difficult couple of months, shoppers now seem to be spending again.”

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Key points:

• London’s economy was the star performer in 2016, continuing a post-recession trend of outperforming of the rest of the UK. With that growth coming hand in hand with rapid expansion in job and population, fueled by immigration from abroad, potential changes in the status of EU nationals and their appetite for working in the UK could knock London onto a different path.
• Retail significantly outperformed UK average GVA growth in 2016
• The retail industry’s performance does not mirror overall regional economic performance. This is down to the fact that there are substantial differences in the importance of retail in the consumer spending basket.

The UK’s regional economies

Figures released by the ONS yesterday show that London’s economy outpaced the rest of the UK in 2016, growing at 3.0% in real terms, nearly twice average rate for the UK economy as a whole (1.6%). Among the nations of the UK, Wales recorded the highest growth at 1.9%, followed by 1.6% for England, 1.2% in Scotland and 1.1% in Northern Ireland. (Figure 1).

Figure 1: Regional GVA Growth 2016

London’s economy has diverged from the rest of the economy since the financial crisis in 2008-9. Its output in real terms is now 18% higher that its level in 2007, the next best performing region, Scotland, has output just 11% higher.

Figure 2: Real GVA since the 2008-9 recession

Much of this outperformance is down to job creation. London has been responsible for nearly 40% of the almost 10 million net jobs created by the UK between 2007 and 2016, despite accounting for just 23% of the UK’s economic output. Job creation has come hand in hand with rapid growth in London’s population. As a result of having more people, and the fact that job creation has not been in the most productive sectors, average living standards in London, measured by GVA per head of population, have grown in line with most of the UK’s nations.

Figure 3: Regional GVA per Head since the 2008-9 recession

Both job creation and economic output in all regions has been driven by growth in service industries, particularly the Human Health and Social Work Activities, Professional, Scientific and Technical Services and Information and Communication industries. Scotland has particularly impressed in the development of its Information and Communication industry, with 32.5% growth since 2007, outgrown only by London’s 40.5%. Even though Financial and Insurance Activities had been a key driver of economic growth in the UK, between 2007 and 2016, Wales has been the only region of the UK where this industry has shown positive GVA growth (9.8%). With financial service companies taking advantage of a combination of the lower cost base and a preferential government industrial strategy, Cardiff has emerged as one of the UK’s key financial services locations. Going forward, we would expect that the service industries will continue to be key drivers of growth in the UK.

While data for 2016 includes the six months immediately post Brexit, it’s difficult to draw any conclusion about geographic differences in impacts, yet. With the feared collapse in consumer and investor confidence in the wake of the Brexit vote not materializing, the immediate impacts of the referendum, particularly the squeeze on real incomes from inflation, did not take effect until 2017. The full impact on business investment decisions are not yet understood and will continue to play out as Brexit talks progress.

The contribution of retail to regional economies

The economic contribution of retail to regional economies has not followed the national trend. Retail across the country grew at 4.0% in real terms, well above the total industrial average. Behind this were low and falling prices, which allowed shoppers to buy more with the money in their pockets, leading to high volume growth and a greater economic contribution.

Differences between regions in the growth of output are harder to explain, particularly given the pattern of growth for retail does not reflect overall economic performance. Yorkshire and The Humber saw the highest growth in 2016, with 9.5%. Despite showing the highest level of GVA growth, London’s retail industry (3.3%) failed to keep pace with the UK average of 4.0%. While the surrounding area of the South East, with -3.5%, was the only region to show a decline.

Figure 4: Regional Retail GVA Growth 2016

However, differences in spending patterns may offer an explanation here: In addition to retail goods, consumers spend on other items, these items vary by region. ONS Family Spending data show that households from London and the South East spend more on housing, recreation and culture than other regions, while South and Eastern regions are the biggest spenders on transport. However, the Southern and Eastern regions are not the biggest spenders on retail goods such as clothing and food (Northern Ireland comes out top here), despite having the highest overall incomes. As a result, households in the South and East of the country will likely have diverted the windfall from cheaper retail goods elsewhere in their spending basket, rather than towards buying more goods, resulting in lower volume growth for retail in these areas.

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Scotland has historically maintained a level playing field with England on the headline business rate poundage. Therefore keeping future rises in Scottish business rates aligned with RPI rather than CPI would put Scottish businesses at a competitive disadvantage compared to firms operating down south, by approximately £25-30 million next year.

Scottish firms operating from medium sized and larger premises already pay more than they would in similar premises in England to the tune of £62 million each year, due to last year’s doubling of the Large Business Rates Supplement.

The four business groups – Scottish Engineering, Scottish Property Federation, Scottish Retail Consortium and the Scottish Tourism Alliance – have combined to speak up in advance of the Scottish Government’s Budget which is expected on 14 December.

Bryan Buchan, Chief Executive of Scottish Engineering, said:

“Given current concerns over forecasted low economic growth and our relatively poor performance in terms of productivity, the government should be doing all it can to stimulate business. Adoption of CPI as the basis of business rates increase calculations would be of assistance and a helpful step forward to achieving a refreshed rates system that offers a real stimulus to new and growing businesses.”

David Melhuish, Director of the Scottish Property Federation, said:

“The Scottish Budget offers the government an opportunity to set a sustainable path to supporting business and taking forward the Barclay Review of business rates. With Scottish economic growth sluggish any uplift in the poundage rate must be measured. Even if a 2% rise were to be applied this coming year the fact is ratepayers in medium and larger sized premises would be paying more than 50p in every pound of rateable value applied to their property, and yet we are only in the second year of the current five-year revaluation period. By limiting any poundage increase, the government can begin to bring the overall business rate for large Scottish ratepayers back into line with England, as recommended by Barclay, and at the same time also support smaller Scottish ratepayers.”

David Lonsdale, Director of the Scottish Retail Consortium commented:

“With shop vacancies increasing and one in every ten retail premises now empty, there is a pressing need to keep down the cost of doing business. Scottish Ministers have said they want to pursue the most competitive business rates regime in the UK, and implementing Barclay’s recommendations on tying uplifts in business rates to CPI rather than RPI would help towards achieving that goal of competitiveness. Such a move would make retailers more confident about investing in new or refurbished shop premises to the benefit of customers and our town centres.”

Marc Crothall, Chief Executive of the Scottish Tourism Alliance, said:

“The Scottish Tourism Alliance fully supports calls for increases in the business rates poundage in Scotland to be linked to the CPI from April, following the Chancellor’s announcement last week that firms south of the border will benefit from the lower level of calculation. We acknowledge the Scottish Government’s pledge to continue the capping of rateable increases for many tourism firms, however there is still widespread serious concern within the industry around the future cost of business rates despite the short term comfort of the interim cap afforded to some. Indeed business rates remained the number one issue of concern in the STA’s recent research into future confidence within the industry. It is vital that Scotland offers a business environment which is as competitive if not more so than what our industry counterparts enjoy south of the border.”

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Following a business campaign led by the British Retail Consortium (BRC), the Chancellor’s has announced in his Budget that the move from RPI to CPI indexation will be brought forward by two years to 2018. Helen Dickinson OBE, Chief Executive of the BRC, said:

“This is a hugely welcome and positive move. From being caught in a web of competing pressures from all parts of the economy, limiting the scope for action, it’s clear that the Chancellor has listened to the retail industry and the growing chorus from across business and commercial life who have spoken up in favour of action to mitigate rising rates bills. Crucially, this relief will unleash investment that retailers want to direct towards the needs of their customers. This will be particularly critical at a time when shoppers’ disposable income is being squeezed further and the growth projections for the economy have been downgraded.

“Introducing three yearly revaluations is also a positive move to improve fairness of the system. These are encouraging first steps, so now is the time to commit once and for all to putting the rates system on a more affordable and sustainable footing, to support local communities, shops and jobs. We are keen to work with Government to deliver on that.”

On the uplift in the National Living Wage

“We welcome the Government’s approach to the National Living Wage for 2018. In a challenging environment, the retail industry has worked hard to implement the National Living Wage, with many paying beyond the legal requirement, as well as extending the rate to all staff irrespective of age.

“Wage growth in retail continues to outpace the economy-wide average. Maintaining productivity gains remains crucial to sustaining this wage growth as employers contend with recent and upcoming changes to statutory employment costs. Therefore, it’s important that future increases continue to be moderate to reflect this and are subject to a fully independent Low Pay Commission.

“We are also encouraged by the Chancellor’s commitment to keep under review the flexibility on how Apprenticeship Levy funds can be spent. Without such flexibility the retail industry will not be able to play their part in supporting the government to meet their three million target.”

On a tax system on single use plastics

“The announcement of an investigation into how a tax on single use plastics can reduce waste is interesting. It begs a number of questions about how the scope of any taxes might work, the timeframe for introducing them, what Ministers hope to do with the receipts, and the impact on consumers and businesses.

“We look to Government to ensure this investigation takes a comprehensive approach to waste, recycling and the circular economy, of which single use plastics and drinks bottles are but one component. Decisions on specific products need to be taken in the context of the circular economy where all resources are valued and reused. We also still await Defra’s 25 Year Environment Plan and a waste and resources strategy. What is needed is a broad, coherent approach rather than numerous piecemeal announcements and initiatives.”

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Retail is one of the world’s most innovative industries, the UK’s largest private sector employer and an industry which is finding efficiencies at a faster rate than many others – which in Government speak means it’s outpacing average productivity growth in the UK. It is also an industry undergoing profound structural change, being driven by the ever increasing demands of customers and the technology revolution.

The BRC points to the risk of an opportunity missed. A backdrop of rising labour and property costs is altering the attractiveness of investment options, as the cost of technology falls and digital capability improves. This has profound implications for much needed investments in local communities, new and refurbished shops, and of course jobs.The implications of this are that it’s the most vulnerable communities that will suffer the negative consequences most acutely.

Specifically, the BRC is recommending that the UK Government:

• Freezes the business rates multiplier in April 2018 which otherwise will increase the bill of every rate payer in the country and simultaneously divert £270m of retail investment from delivering for consumers and away from local investment.
• Keeps the cost of living down for consumers by not increasing income tax rates for the majority of taxpayers and considers accelerating increases in the personal allowance if the squeeze on consumers persists.
• Gives itself the best chance of ensuring its flagship apprenticeship policy is successful by providing additional flexibility in how apprenticeship levy funds can be spent.
• Works in partnership with retail to enhance the basic digital literacy skills of the large parts of the workforce being left behind by the technology revolution and to increase the amount of UK manufacturing of textiles and clothing.
• Ensures business does not face double regulatory charges or new financial burdens from the Withdrawal Bill and makes the necessary investment in infrastructure at ports and border control points to ensure an orderly exit from the EU.

Helen Dickinson OBE, Chief Executive of the BRC said:

“At a time of uncertainty for both the economy and the country, it’s important we set ourselves up for success.

“The cumulative burden of Government imposed costs has become acute. Indeed, September’s inflation figures mean retailers are faced with a £270 million leap in their business rate tax bills alone next Spring. With retailers’ margins being squeezed to their limit, this is money that could be better spent investing in keeping prices low for consumers, in local communities up and down the country and in developing a workforce which is fit for the future.

“Without the Chancellor’s intervention, the consequences for town centres and jobs will be even more keenly felt in the most vulnerable communities. For consumers, the squeeze on household incomes will be compounded as the pound in their pocket buys them even less at the checkout.

“Retailers want to help build the confidence of their customers, us all as shoppers, not damage it. But to do this they need the support of Government policy that keeps down the cost of living, not exacerbates it. That encourages, rather than deters the retail investment necessary to meet constantly evolving customer expectations. And finally, policy action that enables retailers to maximise their vital contribution to the Government’s productivity aspirations.”

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170,000 people from the EU work directly in retail, which accounts for six per cent of the industry’s UK workforce. In some regions of the country and different parts of the industry this is much higher – over a quarter in warehousing and distribution, for example.

The latest report in the BRC’s A Fair Brexit for Consumers series, illustrates how the lack of certainty about the future status of EU colleagues and the UK’s future relationship with the EU, is driving workforce changes that have the potential to impact consumer choice and experience. The new data reveals:

• 56 per cent of retailers revealed that their EU colleagues are concerned about their right to remain in the UK.
• 22 per cent reported that people from the EU have already left their UK workforce.

The retail industry is undergoing a transformation, driven by technology and the changing needs of consumers. This is increasing the need for new and different skills. Therefore, for retailers to continue delivering for consumers now, the Government must recognise the spectrum of skills and experiences that currently contribute to the success of the industry.

The BRC warns that the knock-on impact of a potential reduction in availability of skills and workers, and higher costs of employment could hit consumers. From the service delivered in a store to next day delivery of an online order, from the latest developments for your mobile phone to the prices of what you buy, it is clear that people from the EU play an important and hugely valuable role.

Helen Dickinson OBE, Chief Executive of the BRC said: “The UK’s decision to leave the EU has created uncertainty, not only for business, but for the people from the EU they employ. These are real people with families, livelihoods and homes in this country. It is not right that 16 months after the referendum these people still don’t have the security they need to continue their lives. And from our data it is clear that unless we have the right structures in place to support retailers attract, recruit and retain workers, consumers will soon start to see and feel an impact as they shop.

“First and foremost, the Government must provide certainty for the people from the EU who are already living and working here. The offer of settled status is positive but colleagues need to know the practicalities of acquiring this: how you apply, what it costs and when the cut-off date is.

“Secondly, we recognise that free movement from the EU is coming to an end, and that this is a reset moment. So, at a time when the retail industry is in the midst of a transformation that is changing the very nature of retail jobs, we need a demand-led and simple alternative.  Simple for employees and employers alike and based on consumer need not political rhetoric.

“And thirdly, looking at our domestic workforce; the government should work with our industry to invest in the skills and talent for the future. In particular, for the Apprenticeship system to be part of that investment, retailers need additional flexibility to target Levy funds into ongoing high levels of customer service, rather than it being written off as just another tax.”

Welcoming the report, John Hannett, General Secretary from the Union of Shop, Distributive and Allied Workers (USDAW) said: “Usdaw welcomes the publication of the A Fair Brexit For Consumers report. With this report, the BRC is moving the debate on to try to tackle the real issues behind the headlines. The research in the report illustrates how important the EU migrant workforce is to retail, especially the distribution and logistics that supports the sector.

“I am pleased that the report is recommending that EU migrant workers already working in the retail and distribution sectors should be guaranteed their rights to continue to work and live in the UK.  Many of these workers, who are members of Usdaw and other trade unions, have settled and made their homes here and must be allowed to stay and carry on working in the UK.

“The retail and distribution sector is a big employer of labour. We agree with the BRC that there needs to be a focus on developing the skills of the UK workforce to meet the challenges ahead.  But, going forward, the sector will continue to need EU workers to come and work in retail, distribution and food manufacturing.  We need a debate, based on facts and evidence, as to what that post-Brexit retail sector will look like. I welcome the BRC report as a very positive contribution to that debate.”

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