Retailing and wholesaling are a central part of our economy, contributing “almost 13% of Northern Ireland’s output and almost 15% of all local employee jobs”, stressed finance minister Sammy Wilson in a speech this month. But there are major disagreements about whether the sector will continue to thrive and calls for the Executive to take action to protect independent retailers.
Northern Bank’s chief economist Angela McGowan is one of the optimists, believing that the retail sector remains strong. She points to Christmas trade that was 50% up in some stores compared to a year before and a maintained price advantage in Northern Ireland compared to the South that generates substantial cross-border trade.
“In 2008 the National Consumer Agency in the Republic of Ireland found that branded goods in the major supermarket chains were on average 31% more expensive in the RoI relative to the North,” says McGowan. “Although prices are currently falling south of the border – overall prices fell 3.2% in February compared to one year earlier and food prices fell by 8% – there is still a considerable distance to go before we see like-for-like prices in the two regions.
“Higher VAT in the Republic – 21.5% – and higher wages – reported to be 33% higher for store managers in the RoI – have served to keep prices in the North more competitive. But it is primarily the favourable exchange rate that has amplified cross-border trade since mid-2008. As long as sterling remains weak against the euro, and it is unlikely to strengthen significantly in the short to medium term, cross-border shopping will continue to contribute approximately 0.5% to Northern Ireland’s total economic output.”
While Northern Bank expects there to be a reduction in cross-border trade, it believes retail will grow this year. “Assuming that Northern Ireland’s economic recovery continues to stay on track the outlook for the local retail sector is good, expansion is expected, albeit at a modest rate,” says McGowan.
But Richard Ramsey, chief economist of Ulster Bank, takes a less sanguine view. He believes that cross-border trade has, until now, insulated retail here from the full impact of the recession. “However, within the context of deflation in the RoI and a weakening euro – or alternatively strengthening sterling – this stimulus will recede in 2010,” he predicts. Ramsey also believes that financial pressures on consumers, such as rates and rising VAT, will cause domestic demand to fall, damaging retailers.
“The retail and public sectors will bear the brunt of NI’s service sector job losses in 2010 and 2011,” says Ramsey. “While the large UK retail multiples are expected to continue to unveil further job announcements this year, NI’s overall level of retail employment will continue to fall….. Essentially, NI’s retail sector has become larger than its economic fundamentals can support in recent years. Therefore a notable re-adjustment is set to occur over the next couple of years.”
Esmond Birnie, chief economist at PricewaterhouseCoopers, takes a similar view. “In terms of cross-border from RoI, whilst there will still be some growth in 2010, there are good reasons to expect less than in 2009,” he says. “In overall terms, we expect the cross-border retail trade to continue, albeit less strongly, during 2010. However, we think the euro will weaken in second half of the year and this, combined with the effects of December 09 Dublin Budget in narrowing some of the RoI indirect tax disadvantage, may contribute to a less frantic cross-border shopping experience.
“Outside the border areas, we believe that the NI retail market, particularly as regards the multiples, must be heading towards saturation; particularly give the significantly increased retail growth in Belfast metro in 2004 to 2008, where investment – as measure in additional square footage – significantly moved ahead of both population growth and historic spending.”
Don McFetridge, a lecturer in retailing at the University of Ulster, takes a middle view, believing that cross-border trade will “dwindle a bit”, but is also confident that “Belfast will continue to do reasonably well.” He explains: “There’s more in Belfast than there was 24 months ago, for example Ikea. It’s also seen now as attractive to people from across the water, as a weekend destination.”
In terms of overall demand, McFetridge suggests this will depend on what happens in the Budget and any tax rises imposed after the General Election. “Towards the end of the year I think things will improve significantly,” he says. “Over the next six months I don’t see any major change in retail spending. I think it will be autumn before we will see any significant improvement.” But he predicts that mid-market retailers will remain under pressure, with value and top end retailers best positioned to do well.
McFetridge warns that the ‘store wars’ between Tesco, Sainsbury’s and Asda for market share are more likely to displace existing trade, rather than add to total retail spend. “We have reached supermarket saturation,” he says. “Because things are getting better politically doesn’t mean we are going to eat more.” He also worries whether independent retailers, in particular, can do well unless the shopping centres of towns and cities are made more distinctive and better able to entice people away from out-of-town destinations. He cites Ballymena and Armagh as places that are doing this well, allowing independent retailers to potentially benefit from their location.
The Londonderry Chamber of Commerce likewise stresses planned improvements to the walled city as part of a local strategy to improve the retailing environment. “In Derry we remain optimistic about the future,” says acting chief executive Sinead McLaughlin. “We are currently regenerating our city centre – investing heavily in improved public realm, investing in our access routes, investing in our built heritage. These are just some of the enabling factors that we believe that will give the private sector confidence to invest in the retail sector.”
Yet there are fears amongst many town and city centre retailers across Northern Ireland about the impact of proposed additional investment in out-of-town shopping centres, such as the several hundred million pound schemes proposed by the Orana Group.
Glyn Roberts, chief executive of the Northern Ireland Independent Retail Trade Association, explains: “In Derry alone seven retailers have closed in recent weeks. Some retailers just can’t survive. We have concerns about the Orana developments for Derry and Omagh and the impact on those town centres. There are 12 applications pending [for planning permission for new retail developments], mostly by Tesco and Asda, that threaten towns. That is something the Assembly should get right to protect and enhance the town centres. That would take the pressure off recession-hit retailers.”
Supermarket shopping was 31% more expensive in the Republic than NI in 2008. In the last year, overall prices in the Republic fell by 3.2% and food prices by 8%. VAT is higher in the Republic than NI, as are average wages. Sterling continues to be weak against the euro. So NI retains a cross-border shopping advantage, even after the recent VAT hike here.
Exchange rate benefits
Leading London economists Capital Economics believe that fears of a hung Parliament are keeping sterling weak compared to the euro. “As long as that uncertainty prevails then it is unlikely that the pound will put in a particularly strong performance,” says John Higgins, one of Capital’s economists. After the election, the pound is likely to gain ground against the euro, he predicts – even if there is a hung Parliament, but providing there is a stable government – because of problems with fiscal deficits within the eurozone. Even so, he says, “a big move up in the pound against the euro does not seem likely”.