Comment

After UK Chancellor of the Exchequer Jeremy Hunt trashed Trussonomics on Monday, shares of UK retailers rose.

Maybe it was premature. While the much-maligned economic plan presented by Liz Truss, who resigned as Prime Minister on Thursday, sent the pound plunging and sparked a crisis in the gilt market, a substantial reduction in tax pressure would have softened the blow. of rising prices for many UK households and given businesses more room to invest. Whoever succeeds Truss, higher taxes and a return to austerity seem more likely. Neither is good for consumer confidence or spending.

September retail sales fell more than expected after the death of Queen Elizabeth II and the cost of living crisis took its toll. While consumer sentiment improved slightly in October, it remains around record lows.

The cap on energy prices will continue until April 2023, while the penny reduction in income tax was not due to take effect until next April. Even so, the reassurance that families would have had about their energy costs after April has disappeared. The tax cut would also have helped offset the high cost of basic necessities – food inflation was 14.8% in September, the highest in 40 years, according to the UK’s Office for National Statistics .

All of this can have a psychological effect on consumers, making them think twice before buying. This will take some of the heat out of Christmas trading, with next year set to be even tougher and higher interest rates adding to the burden on Britons.

Mortgage costs are the most obvious victim, but any borrowing to fund large-scale purchases is affected. Marks & Spencer Group Plc chairman Archie Norman warned this week that some families will not be able to pay their mortgages next year if interest rates rise as sharply as expected. And some M&S customers would be among those who would suffer.

So far, most of the attention has focused on the poorest Britons, but rising borrowing costs have spread the pain to middle earners and even some higher earners. Upper tiers of the hard-pressed middle class would have been able to offset some of their rising costs with the now scrapped plan to abolish the top 45% tax rate.

This cohort, which was able to weather the cost-of-living crisis through savings, may soon be able to get their spending under control, such as for hospitality, vacations, and big-ticket items such as cars, home improvement projects, and the furniture. It could even hurt the affordable luxury and high-end fashion segments if they also restrict their spending on clothing.

Wealthier households may also cut sales when it comes to grocery brands – here the retail business of Ocado Group Plc, a joint venture with M&S, looks particularly vulnerable. It faces competition not only from the more upscale ranges of Tesco Plc and J Sainsbury Plc, but also from German discounters Aldi and Lidl, all of which have upgraded their high-end products.

Some buyers are already getting nervous.

Jose Antonio Ramos Calamonte, the new chief executive of Asos Plc, said this week that the trade was “volatile”. The online retailer, whose main customer is the 20-something fashion shopper, said return rates were also affected. Buyers were returning purchases such as bespoke suits and dresses. These require fine-tuning, which makes returns more likely, but it’s also possible that some customers will reverse previous spend after being bombarded with bad news.

The prize for Chancellor Hunt reversing 60% of his predecessor Kwasi Kwarteng’s tax cuts and capping government energy liability is long-term financial stability. This, combined with the fact that retail valuations have fallen over the past year, could be what investors are taking into account.

Indeed, the mortgage market is stabilizing. And Christmas will not be a total turkey. Assuming there is no resurgence in Covid cases, it will be the first in three when the economy is fully open, and even the most needy will prioritize spending on their families during the holiday season.

Energy support can always be extended, targeting those most in need. In the meantime, if inflation can be brought under control and large-scale job cuts averted, there’s a good chance that UK consumers – and those selling to them – will weather the current tumult and make it into a 2024. less difficult. the most drastic changes in their spending habits when they lose their jobs or see others made redundant – neither problem is currently plaguing the UK.

But in the short term, efforts to calm markets and tame inflation mean a tougher approach to Christmas for long-suffering retailers and restaurants and an even more miserable January.

(Updated 3rd paragraph with recent data)

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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