It is hard to believe that a year ago retailers were racing to get inventory into stores as consumers went on a pandemic driven spending spree.
There was so much focus on avoiding inventory shortages, that few retailers stopped to consider that demand might slow down.
While few could have predicted the scope of the Russia-Ukraine war and its impact on global consumer sentiment, by late 2021 inflation was kicking in. With economies committed to revive their services industries, it was safe to assume that a certain amount of consumer spending would shift away from goods and to services. It was also clear that government subsidies and stimulus had run its course.
Warning Signals
Last year a shortage of front line workers in most key markets finally drove up minimum wages that previously had stagnated for over a decade.
Retailers, delivery companies, warehouses and other labor intensive sectors competed for staff. Now they are reducing their workforces. From layoffs to reduced hours, the reversal has a greater impact in that it further reduces consumers buying power.
However recessions hurt more than inflation. During recessions people tend to get laid off, which reduces their spending power more severely than higher prices brought about by inflation.
According to Stanford Univerity, economist agree that the the ideal GDP growth rate is between 2% and 3%
Most key markets are forecast to achieve that this year.
Bad, But Not That Bad
Most economists agree the ideal GDP growth rate is between 2% and 3%, according to Stanford University.
For the full year, the U.S. economy is still supposed to grow 2.5% according to the World Bank.
The British Chambers of Commerce has set its expectations for UK economic growth this year at 3.5% (down from an earlier estimate of 3.6%), while consumer spending is now forecast to grow at 4% in 2022.
Real GDP growth in both the EU and the euro area is now expected at 2.7% in 2022, according to the European Commission.
“Recessions require a significant decline in economic activity that is spread across the economy and lasts more than a few months,” according to the US National Bureau of Economic Research.
In the U.S. consumer spending continued to increase through May (the most recent figures as of this writing), although May figures were up a mere 0.2%, compared with growth of 0.9% in April.
UK consumer spending rose 7.6 per cent in May compared to the same period in 2019, according to data from Barclays Card, which sees nearly half of the nation’s credit and debit card transactions.
Albeit, increased spending could be a reflection of consumers paying higher prices for goods and services.
Still there is a lot of talk about recession. In fact, it has overtaken inflation in Google Trends search volumes.
Searches for "recesion" have overtaken "inflation" in Google Trends search volumes
What’s Next for Brands?
“If we’ve learned anything from previous recessions, it’s that they expose existing weaknesses, accelerate emerging trends, and force organizations to make structural changes faster than they had planned,” said Deloitte.
“We expect a similar pattern to follow – albeit with new trends shaped by a pandemic-driven global recession. Retailers struggling before COVID-19 will likely see their declines accelerate. Income disparities will drive continuing business toward off-brand and discount retailers, and online shopping will continue to accelerate.”
Retailers will once again need to get way ahead of inventory levels, something that should be easier as slowing demand will help normalize logistics. Hoped for price increases might be kicked down the road as consumers with less spending power search for value.
Most retailers should be able to weather this storm, however for those that are already weak, the remained of 2022 and 2023 could be devastating.
