Summer 2007: The impact on your wallet
August, 27, 2007
Economically, this summer could easily be mistaken for a Hollywood disaster movie: Horrendous rain and flooding; stock Market woes; high interest rates; foot and mouth; the muscle-bound pound versus a weak dollar; terrorism. All we need now are some zombies!
It doesn’t take a financial genius to work out that the jinxed summer of 2007 will have an impact on the British economy. So, if all that you feel you’ve missed out on are some barbeques, a dry Wimbledon and a tan then think again. SaveBorrowSpend looks at how this summer is affecting your wallet.
THE HIGH STREET
The impact of the summer deluge is now a cliché in the media, but the economic impact cannot be understated. Fashion chains are selling off unsold summer stocks at massive discounts. Gardening and DIY retailers have been hit hard. But surely these discounts are good for consumers? Yes, maybe now but as the retailers’ margins are slashed, prices will have to be pushed up in the long term to make up for it. It will be interesting to see how the Christmas shopping season is affected this year, another tried-and-tested barometer of the UK economy.
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Five consecutive interest rate hikes have not been good for business either, with the pressure on high-value retail products like furniture and electrical goods (which often rely on credit packages to push sales, in turn affected by interest rates). Less money in our pockets means people are less tempted to fork out for big items like a new sofa or TV, even on seemingly generous “buy now pay later” credit schemes.
The picture isn’t necessarily all gloomy: manufacturers of outdoor clothing, Wellington boots and umbrellas have seen a massive year on year hike in sales (as well as the Myleene Klass bikini range at M&S, which proves that despite the queues we are still flying away to escape this summer!).
Like any market, there are winners and losers; another surprise winner this summer is Domino’s Pizza, enjoying a healthy profit on home deliveries! Traditionally (and tellingly), suppliers of comfort food prosper in times of financial uncertainty. How much shepherd’s pie, posh sausages and curry will stores in the Square Mile sell this autumn?
FOOD
There has been a slump in the sales of barbeque and picnic food, but the biggest loser is still the consumer. Supermarket shoppers are set to face shortages and unavoidable price rises. Farmer’s livelihoods have been adversely affected by floods and certainly not helped by the Foot and Mouth scare. Expect to see the price of vegetables rising and experts are even predicting shortages on the supermarket shelves.
PUBS AND BEER
Fancy a nice ice-cold cider? This was a winner for pub chains last year, but clearly not such an attractive option this summer as pub gardens across the UK were turned into mini-Glastonbury mud baths. Breweries have also invested heavily in attractive outdoor areas to entice the post-ban smokers, but even die-hard nicotine addicts are leaving these new terraces empty as the rain pours down. The pubs will have to claw back the money they have spent and lost… your pint could be costing more as a result (with the £4+ pint already commonplace in London and parts of the Southeast).
As the government concentrates on alcohol as a social problem, another one of the horror stories of summer 2007, it is possible that the drinks industry will be hit come the next budget. The result? Higher alcohol prices designed to impact on “problem” drinkers that also affect people having a glass of wine at home to avoid high pub prices.
INSURANCE
Did you know the floods have cost the insurance industry a staggering £3 billion? Again, this cost isn’t going to be completely absorbed by insurance companies: It will be passed on to you. So expect your domestic insurance premiums to rise as the cost of inadequate flood defence in, say, Gloucestershire impacts on the safer land-locked residents of the Home Counties, North and Midlands.
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TOURISM
Tourism is worth a massive £80 billion a year to the British economy. While the weather, the stock market and Foot and Mouth hasn’t helped, it’s the strong pound that’s had the biggest impact. Britain is proving an expensive choice for overseas visitors and they are staying away. Significantly, American visitors are giving the UK a miss, and they make up the largest proportion of the tourist trade (spending an estimated 4 billion pounds a year). In an unprecedented development, Britain has now dropped out of US’s top ten most visited overseas destinations. At over two dollars to the pound it has become prohibitively expensive to visit the UK (how would you feel if you had to pay over eleven quid for a Big Mac meal, or eight quid for a pint in Central London?).
The floods across North Yorkshire and Gloucestershire have cost the tourism business hundreds of thousands of pounds and the industry is begging for help to recover. This will have a significant impact on jobs and prices.
HOUSING MARKET
This summer’s interest rate rises have already put pressure on home owners. Those of you due to come off a fixed-rate deal in the months ahead will really feel the pinch, as some analysts have predicted a 6% base rate within the next year or so. If life wasn’t tough enough for first-time buyers, they’re now spending a fifth of their total income on their mortgage, the highest proportion in 15 years. Record numbers of people are also leaving the UK (especially in property hotspots like London and the Southeast).
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However, a 6% base rate is still nothing like the interest rate crisis of the early-nineties where negative equity was the rule rather than the exception.
The US “Sub-Prime” lending crisis is also going to mean people with less-than-pristine credit histories are going to find it even harder to get a mortgage as lenders tighten their lending criteria. So what does sub-prime actually mean? Sub-prime lenders specialise is offering mortgages to people with poor credit ratings. US lenders became increasingly bold (or greedy, depending on your point of view) in arranging mortgages for people who could barely afford them. Millions of people are now defaulting on their payments leading to stock prices plummeting and fears of a worldwide economic downturn. Companies specialising in “buying” debt have been especially hard hit, with a trickle-down effect on investments that impact on pensions and other savings. Not good news, admittedly, but some analysts are arguing that the market will recover. However, combined with all the other summer disasters, people are entitled to worry!
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POLITICS
On the political front, current economic uncertainty may dissuade Gordon Brown from calling an early election despite his encouraging lead in the polls. As Bill Clinton famously said, “It’s the Economy, stupid” and politicians of all parties realise that the security of the electorate’s wallet is instrumental in how people vote. The Prime Minister is famous for his long-term relationship with “Prudence.” How prudent would it be to go to the country in this economic climate, whatever the focus groups are saying? Politicians can control lots of things, but certainly not the weather, the intentions of terrorists or, ultimately, global markets.
So, just as the Chaos Theory that suggests the beat of a butterfly’s wings can influence a storm a thousand miles away, perhaps a horribly wet British summer impacts on our economic life in a way we would never usually think about! 
SaveBorrowSpend Philippa Adam
