Buying and selling: The importance of retail in the UK economy
23 May 2012
Today’s retail figures present a mixed picture, with significant monthly falls in some areas and rises elsewhere. But aside from arguments about the poor weather and a somewhat artificial drop in fuel consumption after Easter panic buying, it is clear over the longer term that consumers are buying less, with a fall of 1.1% in the volume of sales since April last year. How worried should we be by this?
Retail is a pretty big part of the UK economy, accounting for around 10% of its GVA and employees. Hence the health of the retail sector has a large impact on headline figures for the UK economy. But its importance runs deeper than that.
Firstly, retail is key in adding value to imported goods. Whilst the UK runs a substantial trade deficit in many key product markets like clothing and consumer electronics, retailers, through their close relationships with overseas producers and their skill at branding, marketing and design, often extract a significant margin on the supply of these goods. Take clothing for instance. In 2009 the UK imported around £10.6 billion more clothes than it exported, around an eighth of our total trade in goods deficit. But of the total revenue from clothes sold in the UK (£46 billion), almost half accrued to UK retailers. Whilst this doesn’t alleviate genuine concerns over the state of the UK’s trade picture, it is encouraging that UK retailers manage to add such a large proportion of value to imported goods.
Secondly, the retail sector is a significant outsourcer, meaning the health of the sector impacts on many other parts of the UK economy. Construction, transport, food processing, vehicle manufacture and business services such as accountancy and office support all rely on the retail sector for a significant proportion of their sales. Therefore when we think about how retailers are faring in the current difficult economic environment, we need to consider this wider business impact.
It is unclear when retail spending will pick up. Consumers face stagnant real wage growth and high (albeit falling) inflation. They are still going through a difficult process of deleveraging following large rises in indebtedness throughout the 2000s, and it may not be until 2019 that household debt falls to sustainable levels. This is likely to hurt retail’s ability to extract value from imports and its positive impact through outsourcing, and makes it all the more important for the UK to refocus its economy towards exporting those new, innovative products for which there is still, or will be, strong global demand.