U.K. Economy Sinks at the Checkout Line
The U.K. supermarket scene is a microcosm of the British economy and holds up a mirror to the global backdrop in developed economies. Low wages and so-called flexible working contracts make it hard for workers to feel they're sharing in the economic recovery, undermining consumer confidence; the grocery companies themselves, meantime, have no pricing power and are in a beggar-thy-neighbor race to the bottom, sacrificing margins to maintain sales.
It's a combination that should loom large in the Bank of England's monetary policy deliberations, curtailing its instincts to raise interest rates. Similar considerations should be high on the Federal Reserve's checklist of things to watch out for when it begins normalizing policy. And in Europe, this should be lighting a fire under the European Central Bank's efforts to rejuvenate growth.
The price war among U.K. supermarkets has erased more than half of the value of Tesco Plc in a year, making Britain's biggest retailer the highest-profile victim of the battle. Tesco's local difficulties notwithstanding -- ditching the chief executive for his disastrous attempt to emulate Jeff Bezos's strategy, followed byaccounting irregularities that may turn out to be fraudulentand have led to eight employees being suspended -- the discounting by two German retailers, Aldi and Lidl, have depressed food prices for the entire U.K. industry:
Aldi increased its market share to 4.8 percent from 3.7 percent in the 12 weeks to Sept. 14, according to market researcher Kantar, while Lidl expanded to 3.5 percent from 3.0 percent. In response, Wm Morrison Supermarkets said this month it's introducing a new loyalty card. Customers will be automatically reimbursed for the difference between what they pay in a Morrison store and any cheaper price available at Aldi, Lidl, Tesco, Sainsbury or Asda. Despite their protestations, all of the U.K. supermarkets are now discount stores.
That competition is subduing inflation in the broader U.K. economy. Figures today show that consumer prices rose at an annual rate of just 1.2 percent last month, down from 1.5 percent in August and undershooting the 1.4 percent anticipated by economists in a Bloomberg News survey. That deflationary environment also prevails elsewhere; Spanish consumer prices dropped 0.3 percent in September, while those in Sweden declined 0.4 percent.
Lower energy prices, with Brent crude oil down about 17 percent in the past three months and nearing a four-year low, are helping to drive down inflation everywhere. That also whacks supermarkets; almost every big U.K. supermarket has a gas station barnacled to its side, andpump prices have plummeted in the past year:
Figures tomorrow are likely to show that even with inflation subdued, U.K. wages are still growing even more slowly. Average weekly earnings probably increased by 0.7 percent in August, according to economists surveyed by Bloomberg. That's up from 0.6 percent a month earlier, though still behind the pace of inflation, meaning workers are worse off.
In the modern world of central banking, the overseers of monetary stability are paid to worry about inflation as they foster growth. With the International Monetary Fund cutting its global growth forecast last week, and Germany today lowering growth forecasts for this year and next, the prospect of consumer prices accelerating seems dim and distant.
What's happening to the U.K.'s grocers is symptomatic of the enfeebled state of the world economy. If companies in the U.K., with the best growth prospects among the Group of Seven, aren't raising either prices or wages, what chance do other countries have? All of which should spell good news for anyone who qualifies for a loan: unless the backdrop changes, there's no reason for higher borrowing costs for months and months.
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