Unlike their US counterparts, many apparel retailers in Europe have seen sales remain surprisingly healthy throughout the recession. But this could all be about to change, believes Mike Flanagan, as moves by several European governments to slash their debts via tax hikes and public spending cuts also start to curb the region’s clothing business. For suppliers, the likely slowdown in demand coincides with rising costs.
Uncertainty, we’re always being told, is bad for business.
Indeed, during the recent British general election, a few commentators claimed April retail sales were looking weak because consumers were worried the election might return a coalition of parties to power. Uncertainty over economic policies, they suggested, was putting people off buying clothes.
It wasn’t. “People will be worried about the uncertainty inevitable in a coalition” was actually a propaganda claim used by the Conservative party to argue for getting a comfortable majority. And a surprising number of observers making that claim were strong Conservative supporters.
In fact April sales turned out to be a great deal healthier than first appeared anyway – so if buyers really were influenced by the election, a sense of uncertainty encouraged a miniature clothes buying spree.
Which wouldn’t be that surprising. Like many other Western countries, the British government is far deeper in debt than it ought to be. Everyone knows that. But, also like other Western countries, the British government has avoided doing anything to reduce the debt.
And for the past two years, that has led to extraordinary growth in the number of garments British clothing stores have been selling. According to official statistics, the EU as a whole has seen higher clothing sales (up 2% in 2008 and 1.2% in 2009) while US sales have been in decline.
Overall, Europe really hasn’t had the recession in clothing sales that the US has suffered. The spate of retail bankruptcies – from Arcandor to Woolworths – was provoked by creditors pulling support during the banking crisis, not by collapsing sales.
So the surviving businesses, with slightly less competition to worry about, have all gone through the past couple of years in better shape than most feared.
Cutting government debt
Now though, Britain’s got a new government whose first job is to cut its debt. Elsewhere in Europe too, governments have been announcing immediate increases in some taxes and immediate cuts in government spending.
Both of which are going to be bad for business in the short term.
So why did so many clothing retailers support the party most committed to cutting that debt quickly? Because they believed – and still believe – that in the longer run, lower government spending means more money spent in the shops.
They may well be right. But for the first year or so (and possibly longer) public spending cuts mean fewer people with cash in their pockets.
It doesn’t matter whether a public servant is doing a vital job teaching children to read, or a total wastrel playing computer games all day: firing him or her still cuts the number of wage-earners. And deciding an official can no longer retire at 50 (which is possible in some parts of Europe) means one less 18 or 22-year-old gets hired.
So however helpful it might be for business if the government cuts its debt, a smaller government will at first mean a smaller economy – and, in turn, smaller sales of clothes.
US emerging from recession
US garment sales fell in 2008 and 2009 because many Americans confronted the reality of job cuts or wage cuts for people still in work.
But higher level of public spending in Europe meant many people on the other side of the Atlantic had government jobs that didn’t disappear, and didn’t impose wage cuts or freezes.
The US is showing signs of coming out of the recession.
Garment sales are up – and in March and April, US clothing import growth wasn’t just limited to China and Vietnam as it had been for most of the previous two years. Instead, garment makers throughout Asia and Central America started seeing sales to the US grow again.
For the first time in years, there’s real overall growth in poor countries’ garment exports.
But I doubt it’ll last. Because we’ve now got three kinds of country:
- Group 1: Those that have announced tough new government measures, involving fewer public servants, lower spending and higher taxes. In Britain, Greece, Ireland, much of Eastern Europe – and now even Italy – a lot of consumers know they’re going to get poorer. Expect these countries to see clothing sales start to slow pretty quickly. And remember, without the UK and Eastern Europe, Europe’s apparel imports from Asia and its Mediterranean neighbours in 2008 and 2009 would have fallen faster than America’
- Group 2: Those – like France and Germany – whose governments have announced commitments to slash debt by 2015, but haven’t yet said how they’re going to do it. Their garment sales might not get much worse for a while: but they’re pretty sluggish anyway.
- Group 3: Those – like the US – where it’s widely acknowledged the government’s in too much debt, but there’s little urgency to do much about it. A commission has been set up to report on how to tackle the problem – but it is doubtful that any serious measures will be taken before the November elections. That may be bad for the economy in the long term – but makes it reasonably likely that clothing sales will carry on showing modest growth for the next year or so.
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