Economists predict a slow 2008

Retailers and producers are facing 2008 with trepidation. Following a dismal autumn in the on-trade at least, the New Year will arrive offering little ground for optimism, even though the prospect of recession is slim.

The economic cycle is slowing and the Bank of England predicts that the UK economy will grow at about 2% rather than 2.75% in 2007. That rate is healthy enough in itself, but it disguises two crucial factors. Corporate profitability growth (which affects employment and thus wage levels) is slowing at the same time as consumer spending is decelerating and inflation rising.
More than a million households face soaring mortgage costs in 2008 because their fixed- or capped rate deals will expire. Today anyone trying to renew a £100,000 mortgage has to pay an extra £80 a month, which comes directly from disposable income that is already being hit by food and energy cost inflation running at their highest levels for a decade. Add that to a stagnant housing market in which prices are falling in several areas and the outlook is for a tightening of purse stings all round.
With raw material costs from grain to glass running at record rates, producers globally are having to slim their margins even further. Expect retailers to squeeze them further as the consumer tightens his belt. But it is not a picture of gloom all round. Global groups such as Diageo and Pernod Ricard expect their organic growth rates to approach double digits based on burgeoning emerging markets while at home the consumer’s demand for extra value for money stands Tesco and Majestic in better stead than most.
The pinch is most likely to be felt in restaurants and pubs, which are usually among the first to be hit by reduced consumer spending and a swing to entertaining at home. They do have one factor in their favour, however. The summer of 2008 is unlikely to be as dismal as 2007’s.

Ron Emler, 12/12/07