With the on-going eurozone crisis, the UK economy is now enveloped in unremitting gloom. Of course, if you over-spend as conspicuously as has been the case over the last decade, the return to normalcy will be immensely challenging – and time-consuming. After years of excess debt, the UK is now experiencing the first elements of a ‘hard landing’.

Last week, the UK retail sector had a shocker, possibly its worst week for generations. The mighty Tesco announced that its core UK like-for-like sales growth over the last quarter, excluding petrol and VAT, fell by almost 1% – its worst performance for 20 years. Whilst Sainsbury’s underlying figures were less gloomy, recent data from other less defensive retailers is far worse. The retail electronics sector remains in a desperate state. Both Dixons and especially Comet (owned by Kesa) are struggling whilst HMV’s share price continues to plummet. Last Wednesday, Mothercare stunned the market, with a trading statement that sent its shares spiralling down by 42% – an astonishing fall for a reputable high street retailer.

In assessing these figures, remember that annual inflation is c5%, so that these like-for-like sales figures are, in real terms, even more depressing.
Currently, optimism is a rare commodity in the retail sector, which partly explains the widely reported last-minute re-drafting of the Prime Minister’s conference speech. The prospects for Christmas already look very grim. Few retailers expect their post-Christmas trading statements to be favourably received.

However, the benefits of a market-led economy mean that it can adjust readily to changed circumstances. Tesco, for example, has already launched parts of its ‘Big Price Drop’ campaign, which – despite an adverse impact on margins – should boost sales. In time, as debt levels revert closer to equilibrium, shoppers will return in greater numbers and lift the high street gloom. But the stark lesson for governments remains – never lose control of public borrowing.

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