Online sales will hurt the high street

We should be cautious using retail sales to tell us what is happening to consumption

WEAK RETAIL sales plus weak retailers equals lower interest rates? The pat reaction to the fall in retail sales in April was that this increased the likelihood of a fall in interest rates, or at least a presumption that the next move in rates, as and when it comes, will be down rather than up - in contrast to the US where it is now pretty clear that the next move will be up.

The poor results from high street retailers, Storehouse yesterday, Marks & Spencers earlier in the week, seem to confirm this picture of stagnation - though of course you have to remember that these figures refer to trading at the turn of the year, not what is happening in the last month.

But there is another way of interpreting both the retail sales figures and the high street results, which is to note that retailing is starting to become a less important way of providing us with our needs. Instead of going to the shops we are spending our money in other ways. First, as we get richer we are tending to buy services rather than goods; and second, when we do by goods we are increasingly buying them from new on- line outlets rather than from conventional stores.

For consumers are fundamentally quite cheerful. The European Commission has charted the confidence of British consumers since the early 1980s, and the results of this since 1987 are shown on the left-hand chart. There was a blip over the last six months, but the general level of confidence is extremely high by historical levels. Even in that trough last autumn it was still high compared with most of this decade.

Now look at the corresponding figures for retailers. The other graph shows the results of the Confederation of British Industry monthly survey of retailers' reported sales - most of them are now showing higher numbers, again after a blip last autumn. But it is nothing like the boom of 1996/97, and if there is only a positive balance of about 15 per cent that means that a lot of retailers are still reporting lower sales. Why?

It would be nice if we had the figures which enabled us to see changes in the proportion of consumption that is accounted for by retail sales and the proportion that goes on other things, but I haven't been able to find a decent run of this data. Even if we did have the data, it would almost certainly be unreliable - a lot of the service spending is in the informal economy, outside the tax net, and in the case of booze coming in across the Channel, outside the country.

Nevertheless, the bits of reliable data that we do have - things such as passenger movements though airports - confirm that there has been no easing of activity. If anything, the service industries seem to have continued to prosper through the winter. Anecdotally then, there does seem to be a switch taking place between spending money in the shops and spending it on services. The shops in high streets are relatively quiet, while the cafes and bars round the corner are booming.

In particular, the new services are certainly booming - mobile telephony, computers, and the various Internet-related activities. Computers might seem to be a physical object rather than a service and of course they are. But they are the consumer product most likely to be bought on mail order instead of through a store. So while the high street has benefited to some extent from the massive re-equipping of our homes with new electronic kit, it has not benefited as much as it ought to have done.

Then once the computer is installed, we are able either to download products which previously would have had to be bought in a store, or buy direct from the manufacturer, thereby cutting out retailers yet again.

We do not yet know, but we may be at the beginning of a switch in shopping habits as radical as the invention of the supermarket or the out-of- town shopping centre. Direct shopping may not become as important here as it is likely to do in the US, but it is undoubtedly going to become more important.

And it is becoming more important particularly for the new products in software and entertainment. The more we switch our spending to new products, which almost by definition we will continue to do, the less likely we will be to buy those though conventional channels. I suspect that we are just beginning to pick up this switch in the monthly sales figures.

This has implications which go far beyond the immediate questions about the state of the UK economy. For example, the more that consumption switches away from retailers, the greater the changes that will take place in the present structure of our towns.

We have already seen the impact of out-of-town shopping centres on the high street; now there is a further force, which while it initially might be bad for high streets, may ultimately be even worse for the shopping centres. High streets, after all, are centres of culture and entertainment, while shopping centres, for all their virtues, do not seek to create a great cultural experience.

Look at the way that banks in city centres are being transformed into restaurants. A high street full of bank branches is a less cheerful environment than one full of restaurants.

So, just as we need to be cautious about using figures for manufacturing as a short-hand for what is happening to the productive side of the economy - for manufacturing accounts for only about 20 per cent of GDP - so we should also be cautious about using retail sales as short-hand to tell us what is happening to the consumption side of the economy.

This will be very important as this year progresses. Expect retail sales to remain relatively subdued.

But expect the other aspects of consumption - particularly in the purchase of new telecommunications and Internet-related services - to be much stronger.