In 2018, the British high street endured its worst Christmas since the global financial crisis of 2008. Figures released by KPMG, which audits many of the firms in the survey, show that December retail sales fell by 0.7 per cent on the previous year. This follows a dismal 2018 for the high street, a year when shops on Britain’s top 500 high streets were closing at a rate of 14 per day.
Much of this reflects greater competition from online retailers. Many consumers have abandoned the high street in favour of websites such as Amazon. But sales for online retailers fell below expectations too. ASOS’s sales for the Christmas period were significantly lower than anticipated, prompting a fall in its share price of nearly 40 per cent.
Brexit provides an easy scapegoat for the high street’s poor performance. According to this view, uncertainty over the future of the UK’s relationship with the EU is encouraging consumers to delay purchases until later in the year.
It is true that many consumers seem to be displaying this thinking over the purchase of major assets such as housing. House prices have stagnated, and even started to fall in some places, as people put off purchasing until after Brexit.
But this is because people think very differently about asset purchases as compared to current spending. Purchasing a house is a financial investment so consumers make decisions based on their expectations about its future value, rather than simply the happiness they derive from consuming it now. House prices are likely to fall post-Brexit, so people have stopped buying.
Christmas presents are an entirely different matter. No one treats buying socks, jumpers and books like they do houses. People have to buy Christmas presents, and they’ll buy as many as they think they need, subject to what they can afford. This is the crux of the problem facing British high streets: British consumers are too poor and indebted to provide the kind of revenues that they need to turn a profit.
Since the financial crisis, we’ve been living through an almost unprecedented period of stagnation in people’s living standards. The UK is currently undergoing the longest period of wage stagnation since the Napoleonic Wars. The Conservatives are fond of pointing out that employment is high, but low wages mean the link between employment and prosperity has effectively been severed.
If the wage squeeze dealt a blow to consumer demand, then austerity has finished the job. The combination of benefit cuts and the inexcusably capricious sanctions regime at the heart of the Universal Credit system have left as many as one in eight working families living in poverty.
And yet, for the last few years, consumer spending has been relatively strong. In fact, it has been the only thing keeping the economy afloat. The other components of GDP – business investment, government spending, and net exports – have each contributed a negligible amount to growth over the past few years.
Clearly, these high levels of spending have not been driven by rising wages. Instead, they’ve been driven by debt. 2017 was the first year since 1988 – the height of the Lawson boom – when consumers spent more than they earned. Levels of unsecured consumer debt – debt not backed up by collateral, like credit card borrowing – are now the highest they have ever been.
These rising debt levels follow the pre-crisis explosion in household debt, which peaked at 148 per cent of households’ disposable incomes in 2008. Since then, low wage growth has made many consumers unable to pay off the debts they accrued before 2008, whilst low interest rates have encouraged them to take on even more. Today, household debt stands at around 133 per cent households’ disposable incomes – roughly the same level as it was in 2005, in the midst of the pre-crisis bubble.
These levels of debt are entirely unsustainable in the absence of wage increases or growth in the rest of the economy. A small rise in interest rates, or a turn in the business cycle, could tip many households into insolvency. It is no wonder that the high street is struggling.
Over the long term, the only way to deal with rising debt is to increase wages. This will require a massive increase in workers’ bargaining power, as well as a much higher – and better enforced – minimum wage. But higher wages will not be enough to treat the hangover from the pre-crisis debt boom.
In the words of US economist Michael Hudson, debts that can’t be paid, won’t be paid. We’re still living in a Ponzi economy in which we are denying the severity of the debt problem, and instead opting to kick the can down the road. What the UK economy really needs is a write-off of unsecured consumer debt – not just to save the high street, but to save the whole economy.