Retail outlook remains grim
In January, Retail Excellence Ireland responded to the government’s u-turn on the abolition of upward-only rent reviews
Despite the better-than-expected January VAT returns and car sale figures, the outlook for the retail sector remains grim writes Dan White
Print14 February 2012
In January, Retail Excellence Ireland responded to the government’s u-turn on the abolition of upward-only rent reviews
With the 2% increase in the standard VAT rate to 23% coming into force on 1 January, all eyes were on the end-January exchequer returns, the first to be published since the new rate came into force. In the event forecasts of Armageddon proved premature, at least for now.
In the first month of 2012 the government collected a total of €1.72bn in VAT, a 3% increase on the January 2011 figure. So were fears that the VAT increase would prove to be counter-productive exaggerated?
It’s almost certainly too early to say. Firstly the January exchequer returns reflect transactions conducted in the pre-Christmas December period, the busiest time of the year. The first set of figures to reflect the new, higher VAT rate will be the February exchequer returns which won’t be published until early March.
Secondly, unlike Christmas 2010, the weather was kind to retailers this Christmas with average temperatures this festive season being more than 10 degrees higher than they had been 12 months earlier. This combination of more clement weather conditions and consumers bringing forward purchases of big-ticket items to beat the higher VAT rate almost certainly went a long way to explain the surge in VAT receipts recorded in the January exchequer returns.
Even car sales were up
January car sales, without the benefit of the scrappage scheme, also defied the pessimists. New car sales in the first month of the year were up 6.5% to 14,500.
So did pessimists like myself get it wrong? Will the VAT increase deliver the extra E670m of revenue which the government has pencilled in for this year?
It’s possible but, the January exchequer returns and new car sales figures notwithstanding, it might not be a good idea to bet on it.
Like VAT, the new car sales figures were also distorted by the introduction of the higher VAT rate at the beginning of the year. VAT on new car sales is paid when the sale is completed, however many purchasers agreed deals in December, qualifying for the lower VAT rate, but only registered their new wheels in January, hence the higher-than-expected new car sales for that month. The front-loading of new car purchases almost certainly helped boost the December VAT take also.
If, as seems likely, the January exchequer returns were boosted by a once-off combination of timing and climatic factors, then we are likely to feel the impact of the VAT increase sooner rather than later.
For most of last year the value of retail sales was declining at an annual rate of more than 3%. However, that fall bottomed out in November and reversed itself in December when a 3.4% annual increase was recorded.
Has the market finally bottomed out?
So is the long collapse in Irish retail sales, which saw the value of Irish retail sales shrink by a quarter from their 2007 peak now at an end? Once again the jury remains out. While the CSO figures do point to at least a bottoming out in the value of retail sales, the view from industry groups remains pessimistic.
In its most recent Irish Retail Industry Performance Review, Retail Excellence Ireland found that the value of retail sales fell by a further 1.58% in the final quarter of 2011 compared to the same period in 2010. However, the Retail Excellence figures did record an increase in the value of December sales of 1.82%, the first such increase recorded since March 2008.
Sales per square foot down
Unfortunately there was less, much less, to these apparent sales increases than met the eye. The Performance Review reveals that underlying average sales per square foot were well down across most categories in the final quarter of 2011.
However, with the VAT increase about to make its presence felt and the Central Bank having slashed its 2012 economic forecasts, predicting that GNP – basically the domestic economy – would shrink by a further 0.7% in 2012, the omens aren’t good.
This will be the fifth year that GNP has fallen and will bring the total contraction in the domestic Irish economy to 18%. This is not a common-or-garden recession but a full-blown 1930s-style Great Depression with the dole queues and banking crises to match.
No abolition of upward-only rent reviews
Against this environment it is difficult to see any sustained increase in the value of retail sales. Further complicating matters has been the government’s capitulation to the property lobby, AKA NAMA, by reneging on its pre-election promise to abolish existing upward-only rent review leases.
With sales likely to remain at or close to their current depressed level for the foreseeable future it is now clear that there will be no return to the halcyon days of 2007 anytime soon.
This means that the outlook for most Irish retailers is going to remain bleak. The government’s decision to protect the property sector at the expense of retailers is certain to condemn many, many more retailers to closure this year.
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