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Scottish Economic Report: March 2004
Chapter 4: Selected Economic Issues
Scottish Retail Sector 1
Elinor Jayne - Scottish Retail Consortium;
Margaret Holligan & Jeremy Peat, - Royal Bank of Scotland
The beginning of the year is always a good time to reflect on the year that has just passed, to provide a foundation for crystal ball gazing. 2003 saw a disappointingly slow but belatedly sure, turnaround in the fortunes of the overall Scottish economy. This is most welcome, and the prospects for the year ahead - for Scotland, the UK and the global economy - look brighter than they have done for several years.
In this article we look in greater detail at one of the key employers in the Scottish economy - the retail sector - but do so in the context of an overview of the broader scene.
Scotland is most certainly not an economic island. Our performance is to a large degree contingent upon not only how well our neighbours in the rest of the United Kingdom are faring, but also developments in the global economy, and specifically in the USA and the Eurozone.
Sustained US Growth?
The US economy witnessed a remarkable acceleration in economic activity in 2003. Although there has been more than one false-dawn of recovery there, the improvements in the data are now more broad-based and hence more convincing. Consumer demand remains robust, but conditions have improved in other areas. Of particular importance has been the pick up in business investment. This should, in turn, be accompanied increasingly by growth in employment which will both support consumer demand in 2004 and demonstrate that businesses are sufficiently secure about the outlook to both invest and recruit.
.. Albeit with Risks
Consequently we are optimistic about the US in 2004, and expect GDP growth of 4 to 4.5 per cent in 2004. This implies better news globally. However, there is a major caveat regarding the US economy. Concerns have been mounting regarding the ability of the US to continue to finance its burgeoning trade deficit, placing significant downward pressure on the dollar.
And Closer to Home?
Whilst the main engine for growth in the global economy will come from the pick-up in activity in the US, what can we expect from the Eurozone? The Eurozone is particularly important for Scotland, as this is where our main trading links lie. There are signs that recovery there too is getting underway but year ahead will remain difficult. Eurozone growth will struggle to reach 1.5 per cent in 2004, but even that would be better than 2003.
In recent years the UK economy has performed relatively well. Growth in 2003 was slightly below trend, at 2.1 per cent, whereas 2004 should see a pick-up to an above trend 3 per cent. Re-balancing of growth should also be well underway in 2004. Business investment is expected to pick up this year, but we do not expect the bounce back to be as strong as in the early 1990s. Net exports should also exert less of a drag, given world trade acceleration and Sterling's welcome depreciation against the Euro.
UK interest rates are set to rise further, but should remain low by historic standards. On balance, we expect the base rate to peak at just under 5 per cent by the end of 2004.
The Implications for Scotland
Where does this leave Scotland? As has been well documented, the Scottish economy has under-performed the UK in recent years - perhaps inevitably given its relative over-dependence upon manufacturing, new technology and exports to Europe, all laggards since the millennium. But, behind the headline growth figures, there have certainly been more positive data. Private services, with financial services and retail sectors in particular, have grown but production sector output, including manufacturing, has fallen sharply. Current survey evidence, thankfully, presents a more encouraging picture.
The most up to date picture of what is happening in the Scottish private sector comes from our Purchasing Managers' Index (PMI). The PMI is produced monthly for the Royal Bank of Scotland by NTC Research. The most recent data, at the time of writing, are for January 2004. These data showed that the Scottish private sector had expanded for the seventh consecutive month and output was at its highest for more than 3_ years. The January data also presented further evidence that the manufacturing sector was benefiting from a pick-up in demand from the US and Asia. The figures showed a fifth month of expansion in new export orders, which augurs well for future production levels. The service sector too reported further strong growth in January, with the eighth successive month of expansion in activity and a further increase in incoming new business.
The January data also showed further encouraging signs on the employment front. For the second successive month there was a reported increase in numbers employed in the private sector in Scotland. Both the manufacturing and services sectors indicated a marginal improvement in staff numbers.
The Scottish Retail Sector in Context
One particular part of the services sector in Scotland that we are able to track regularly, absolutely and relative to the UK as a whole, is the retail sector. That is good news, because the retail sector is a key indicator of the health of consumer demand generally, and crucial to both economic prosperity and employment prospects. Together with related sectors of wholesaling and the motor trades, the retail industry generates about 11 per cent of Gross Value Added in Scotland. Moreover, while Scottish manufacturing has been in decline since 2000, the combination of retail, wholesale and motor trades has continued to grow strongly. Along with the rest of the UK, Scotland was particularly dependent upon consumer - and retail - strength through the lean years for the global economy; and Scotland remains reliant on this sector even as other elements recover.
As measured by Gross Value Added (GVA), the retail sector continues to grow faster than the overall economy, even though retail has slowed from the strong expansion seen in the late 1990's. Over the last four quarters for which data are available (to 2003 Q3), retail GVA has increased by 5.6 per cent per cent, compared with 2.1 per cent for the whole economy. Looking at just the latest quarter, retail GVA was up 5.3 per cent on a year earlier, significantly greater than the above trend 1.9 per cent increase for the whole economy.The healthy growth of the retail sector in Scotland tends not to hit the headlines as regularly, nor to generate as much debate as the bad news stories regarding the decline in manufacturing. However, as manufacturing employment falls back, the retail sector grows. After re-skilling, the retail sector is attracting many employees who used to working in the manufacturing industry.
Retailing in Scotland accounted for some 231,000 employees in 2003 - just over 10 per cent of all those employed, making it the third largest employer in Scotland. This share has remained fairly static over the past few years. For part-time jobs only, retail's share has also remained virtually unchanged, edging up to 6 per cent from 5 per cent in 1997. Full-time jobs in retail now account for about 20 per cent of all full-time jobs, compared with 24 per cent in 1997, as other companies - notably in the banking, finance and insurance sectors - have expanded in Scotland.
Total retail sales in Scotland are estimated at just under 20 billion (representing approximately 7.8 per cent of total UK retail sales.)
The SRC/RBS Retail Sales Monitor (SRSM), produced by the Scottish Retail Consortium and Royal Bank of Scotland enables us, each month, to track the performance of the retail sector in Scotland and to draw comparisons with what is happening in the UK as a whole. Throughout 2003 the SRSM has shown strong and stable growth in total retail sales in Scotland, with like-for-like sales growth consistently - and perhaps surprisingly - out-performing the rest of the UK.
Fuelled by confident consumers, low interest rates and a buoyant housing market, the SRSM shows that retail sales have been growing at a pace significantly faster than growth in the Scottish economy as a whole. The value of total retail sales in the three months to January 2004 was up 6.3 per cent on a year ago, with a corresponding increase in like-for-like sales of 4.9 per cent. This implies that the actual size of the retail base in Scotland has expanded, in addition to the increase in like-for-like sales.
In contrast, latest available figures for growth in the total economy, as measured by gross value added, showed a year-on-year real increase of only 2.1 per cent. Even after allowing for inflation, Scottish retail sales growth, for the same period, would still approximate to a far healthier rate of increase - of around 3.2 per cent .
Meanwhile, the BRC-KPMG Retail Sales Monitor (RSM) shows that retail sales in the United Kingdom as a whole are performing less strongly than in Scotland (See Chart 4.1.1) Total sales in November - January were 4.4 per cent higher than a year ago, and like-for-like sales were much weaker, with an increase of only 1.7 per cent.
This differential is in line with trends in the GfK monthly consumer confidence barometers for Scotland and the UK as a whole. The latest data for both shows that consumer confidence in Scotland remains slightly stronger than for the UK as a whole. The UK indicator was negative throughout 2003 and edged up to zero in January 2004. Having reached a 9-month low in November of -6, it then rose to -5 in December and zero in January this year. In contrast, the indicator for Scotland alone remained positive from May to September, and was only negative for the last three months of last year. In January it turned positive again, rising to +1, the same as in September but still less than the +3 in August.The factors influencing Scottish retail sales are varied. In 2003 world events and international tension will have further impacted on tourism. Whilst London suffered from low tourist numbers - and generally lower retail sales due to other issues such as the closure of the Central Line and extreme summer temperatures - Scotland had a relatively positive year. London's retail sales figures have a dramatic effect on the UK's overall retail sales performance and in 2003 this effect was to subdue growth. In addition, the generally dry and sunny weather that was enjoyed north of the border led to a high level of domestic tourism in Scotland, attracting visitors from across the UK.
One of the factors that makes the retail sector in Scotland distinct from the sector throughout the rest of the UK is the growing significance of tourism to retailers. Tourism is important to particular geographical areas in the rest of the UK, but retail spend by tourists has more of an impact in Scotland. Both UK and overseas tourists to Scotland spent more per trip than tourists visiting the UK as whole. In 2002 overseas residents spent an average of 510 per visit, compared with 480 for foreign tourists visiting the UK. Spending in Scotland was also relatively greater for British tourists: UK residents spent 199 per trip when visiting Scotland, but only 160 per trip when visiting the whole of the UK. According to VisitScotland figures on retail spend by tourists, visitors to Scotland spent 620 million in shops in 2001 and 763 million in 2002. As a proportion of turnover in the retail sector, that was 3.94 per cent in 2001 growing to 4.3 per cent in 2002.
Given that Scotland recorded extremely high levels of tourism in 2003, it is anticipated that the impact of retail spend by tourists in 2003 will be even greater. Latest data show that in the third quarter of 2003, overnight visits were 1.4 per cent higher than a year ago, with a 5 per cent increase in those from North America and a 9 per cent gain for other non-European countries. A contribution of over 4 per cent of turnover is hugely important to retail businesses, and it could well be even higher for some smaller businesses located in rural and remote areas of Scotland, with significant tourism flows. For these businesses, tourism can actually be a make or break factor.
A pattern has emerged that tourists from overseas tend to spend more per head than do their counterparts from within Britain. As a result, the global economy and its impact on international tourism is very important to retailers in Scotland. On the other hand, there are elements of retail spend by tourists that rely more on volume rather than value. For example, self-catering tourists have a huge impact on stores selling provisions for this type of tourist in the Highlands and rural areas of the country. Therefore, the benefit of tourism to the retail sector very much depends on the type of retailer, e.g. food versus cashmere, and the type of tourist, e.g. self catering or city break. Further analysis of retail spend by tourists is being carried out by VisitScotland whilst it develops a brand plan for retail tourism.
Looking ahead, we expect the overall Scottish economy to perform closer to trend in 2004 than has been the case for the previous three years. In this context, with unemployment stable and low, the housing market achieving a soft landing and interest rates rising modestly, we see no reason why the Scottish retail sector will not continue to benefit from strong, albeit gently tempering, consumer demand. Better performance than the UK as a whole will not necessarily persist; but, with a generally improving picture in tourism and the rest of the Scottish economy, the tills are expected to keep ringing in the year ahead. Consumers will continue to benefit from very strong competition. Margins for retailers will remain exceedingly tight and for the smaller players 2004 will be another tough year. The impact of internet sales is a difficult one to call, but there is no doubt that these will continue to erode shop-based sales and exert further downward pressure on prices. Decent levels of demand and increasing competition are the key messages for 2004.
Footnote
1. The views expressed in this article are those of the authors, not the Scottish Executive
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