A recent survey by the Confederation of British Industry (CBI) revealed that businesses operating in the retail sector were severely impacted over January, with a mere 37% of retailers claiming that they sold more than January 2010, indicating a drop of almost 20% on the previous month.
The 2.5% increase in VAT at the beginning of January this year is thought to be the main culprit for the drop in sales, according to the CBI’s distributive trades retail survey.
The study by the CBI has dampened hopes that January would witness the retail sector see a return from it’s worst performance on record in December 2010.
As a consequence of this increase in VAT many retailers are expecting to see business growth drop further in February, with the balance expecting a rise in sales dropping to 25%.
The CBI believe that tough times lie ahead as wages fall further behind price increases. Ian McCafferty, Chief Economic Advisor to the CBI, commented:
“The lure of seasonal sales and price discounting may have helped mitigate some of the impact of the VAT increase on volumes.”
Mr McCafferty added that in spite of this, retailers are expecting sales growth to slow over the following month, and orders placed with suppliers have evened out. He added:
“Consumer demand is expected to be weak in the coming months, as the spending power of households is hit by a combination of sharply rising prices and weak wage growth. Retailers can expect a challenging period ahead.”
However, why this drop in retail business has come as a surprise to many is beyond this writer! Surely it makes sense that, if the Government increases VAT tax to goods, businesses are going to struggle to keep costs low. In addition to this, with the average wage dropping behind the price of goods, why are so many economists surprised that the retail sector has been badly affected?! Surely it’s simple economics… isn’t it?