e-spaces

December 5, 2008

By Mark Potter

“I’m going to spend less this Christmas. More for the children; less for the adults,” said the retired nurse, bustling empty-handed through the granite and marble splendour of Europe’s newest, and most luxurious, shopping mall. “People aren’t spending. People have lost confidence and they are really saving their money.”

Governments and retailers, fearing this attitude may be widespread as the financial crisis deters spending from the US to Iceland, are dreaming up innovative ways to persuade people to part with cash.

Governments are giving away billions of dollars in tax cuts to put money into shoppers’ pockets.

On the bright side, for the shopper who has any cash to spare, Christmas looks like being a reasonable deal.

“I’ve bought a couple of nice jackets, one of which was reduced by 40 percent,” said Carmen Sanchez, a shopper at Spanish clothing retailer Cortefiel, which is offering discounts of up to 50 percent as it struggles to meet business targets set in a leveraged buyout.

The worry is consumers will simply use any extra cash to pay off debts racked up when money was easy. Sensing prices could fall yet further, some shoppers are also holding back in the hope of scooping even bigger bargains later.

A dilemma for retailers and policy makers is that discounting is all very well if it persuades shoppers to spend. But if they are unsure of their jobs and think more cuts lie ahead, they may hold off – precipitating deflation.

“The global economy is experiencing a classic hangover from a credit binge,” said IHS Global Insight economist Sara Johnson, who expects consumers’ priority will be to rebuild savings.

IHS is forecasting that world economic growth will slow from 2.7 percent this year to 1 percent next year, its lowest since 1982.

Consumer spending, which drives about two-thirds of economic growth in the US, could slow even more sharply. The America’s Research Group predicts the first fall in US pre-Christmas holiday spending in a quarter of a century.

“Yesterday I received my social security savings [statement] and looked at it. I’m concerned. I’m going to put more away,” said Rose Fernandez, a law enforcement worker in New Jersey, adding she had recently cleared $6 000 (R62 000) in credit card debt.

Governments are alive to the risks. US president elect Barack Obama is working on a growth-boosting package that economists predict could reach $700 billion or more, and the EU is examining a €200 billion (R2.6 trillion) plan.

Britain has tackled head-on the danger that consumers may save any extra cash by cutting its main sales tax, but is planning to raise it again at the end of next year, in a bid to give shoppers an incentive to spend sooner rather than later.

Taiwan, meanwhile, plans to give its 23 million people a shopping voucher each worth T$3 600 (R1 100).

The proposal has been well received on the streets of Taipei, although few think it will make a big difference. “I’m looking forward to it boosting my business,” said Lin,..

“It might not be worth anything to the rich, but it’ll definitely help the poor,” she added, saying she planned to use her family’s vouchers to buy a new television.

The levers of economic policy take time to move the gears of consumer spending – time some retailers do not have as they prepare for Christmas, which in Western countries accounts for an estimated 40 percent of annual sales.