In this Small Business Show special, Limerick Chamber of Commerce economist Orlaith Borthwick looks at our main shopping streets and says elasticity is the key to getting consumers shopping again.
Towns and cities across the country continue to feel the brunt of the economic decline that has cast a shadow over Ireland in the last number of years. The reality has left many small indigenous independent shop owners with little alternative than to close their doors and literally shut up shop.
The drastic decline in retail has had a negative impact on the towns and cities across our country. While there is merit in a focus on measures to reinvigorate the ailing main streets, from free parking initiatives to the creation of ‘town teams’, addressing the heart of the problem requires a far more radical policy shift by central government. Because to date, government policy has in fact aided the demise of the main street.
A consumer is no different to any other economic unit; their ability to demand goods and services is contingent on the supply of money. Levels of disposable income are what ultimately drive the demand for retail sales. And while government policies are rightly focused on returning to work those who have found themselves reliant on social welfare, little reform of policy to incentivise those with money to part with it has been introduced.
On the contrary, policies which this Government has pursued have eroded any will or ability to spend, while increases in VAT and changes to PRSI have eroded many retailers ability to compete and drive cost efficiencies.
By June this year 232,450 more people were on the Live Register than in the same month in 2007; approximately 50,000 of whom are from within the retail sector itself. These individuals and their families have exited the discretionary spend market.
So that just leaves those in employment with the ability to have a discretionary spend — but what has the Government done to ensure that those with disposable income spend money in order to support the 270,000 people (equating to 15% of the workforce) currently employed in the retail sector? The answer is very little.
Consumers are both price and income sensitive. As a rule of thumb, as the price of a good or service rises, consumers demand less. Consumer demand is most sensitive — ,or as we call it in economics elastic — to changes in income. As income falls, there is a disproportionate correlated decline in the demand for goods and services, particularly for luxury items.
While Ireland’s inflation rate has stabilised to an annual rate of 0.6% since 2008, our consumer price levels remain the third highest in the eurozone and are 17.6% above the EU27 average. If net income continues to be eroded by changes to the direct tax regime and hikes in indirect taxes, then consumer demand will continue to be dampened and our main streets will continue to struggle.
Add into the mix the emergence of an entirely new form of competition to the main street, a perfectly competitive market, with little or no barriers to entry, where consumers can instantly compare prices, and one where businesses are not faced with the same operating costs as those with a main street presence.
It may surprise some that the Irish spend almost €4bn per year online; but what is more shocking is that almost €3 out of every €4 spent is on overseas goods and services. These imports equate to both a nominal euro leak out of the circular flow of money and also dampen the possible multiplier effect on the domestic economy.
Government needs to react to market conditions at the same speed in which consumer spending patterns are shifting. Global digital payments will reach $4.7 trillion by 2019; primarily driven by the growth of mobile-commerce which continues to outpace ‘traditional’ online shopping methods such as PCs and laptops. The shift from ‘brick to click’ is here to stay.
Many commentators are now predicting a return to growth in personal consumption for 2014; the impact of which will inevitably be felt on the main street. Having collapsed in the last number of years, investment is also predicted to grow, albeit from a low base.
Adjusting for the patent cliff, export growth continues to remain steady, however is contingent on international markets, on which we have no control.
So can Budget 2015 deliver greater levels of stability and quell the fears of businesses across the country, or will government persist and insist on a €2bn adjustment?
We all know that if we pull a rubber band too tightly, it will snap and break. But if we ease the pressure it will snap right back into place. It is elasticity that enables this to happen.
Consumers are like elastic bands: Yes their consumption patterns are sensitive to both price and income changes. But they want to return. And government needs to enact policy which facilitates this.
Recent policies have increased the cost of doing business (PRSI hikes, changes to sick pay regime), increased the purchase price of goods (VAT hike) and decreased peoples’ net disposable income (plethora of changes to direct and indirect taxes).
Our main streets are at breaking point; in Budget 2015 the Government needs to release the pressure on our elastic customers to enable them to snap back into consumption habits and return to the main street. Otherwise, it will be too late and the rubber band will snap and remain irreparably broken.
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