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If you were looking for a model of what is happening to the UK economy, you could do a lot worse than to follow the ups and downs of its biggest privately owned retailer over the last five years. Wilco filled the low-cost, non-food retail gap left on UK high streets by the closure of 807 Woolworths stores in the aftermath of the 2008 crash. And even before the arrival of SARS-CoV-2, the company suffered the same low growth and rising costs experienced across the UK’s town centres. Considered “non-essential,” the stores faced months of closure during the pandemic but was hit by the same upsurge of demand when the economy reopened in the late summer of 2021.
Unfortunately, the company swallowed the establishment media Kool-Aid about the “V-shaped recovery” and the post-pandemic era of prosperity which was supposedly just around the corner. Viewed from this mainstream perspective, the late summer of 2021 looked like the early phase of an economic boom which, because of supply and labour shortages, the company was at risk of missing out on. And so, the company reached out to new suppliers, and turned to rail freight to get around the UK’s road transport shortage. And, as with companies up and down the country, they took on any employees they could find… and then the proverbial hit the fan.
The release of pent-up consumer demand masked to some extent the impact of broken global supply chains. But while the brief consumption boom ended quickly, supply shortages were just the beginning of a broader supply shock, as eye-watering hikes in energy prices took off in the autumn of 2021. For retailers like Wilco, this meant that costs were rising even as consumer demand was tailing off, and as supply shortages persisted. In the company’s accounts for the year, they began to contemplate a “severe but plausible downside scenario” in which costs continued to rise even as sales continued to fall through 2022 and into 2023.
As it happens, this “severe but plausible scenario” turned out to be wildly optimistic. Energy prices – which feed into and multiply the cost of everything else – remained high and were compounded by sanctions on Russian fossil fuels following the invasion of Ukraine. If that wasn’t bad enough, the Bank of England, which initially and correctly stated that the inflation was transitory (i.e., it would last two or three years before prices settled at the new high), went into panic mode and implemented the fastest interest rate hikes in history. This hit Wilco badly in two ways. First, the rent on its high street stores was increased as commercial landlords struggled to service their own debts at the new and higher rates of interest. Second, and more recently, the lines of credit which all retailers use to fill the gap between suppliers and consumers, were less available as lenders tightened their standards… leaving Wilco with some £250,000 unpaid debts to suppliers.
Out of sight of the establishment media, the company was already struggling by the beginning of 2023. A new management team was brought in (seldom a good omen) to try to reverse the company’s fortunes. Some 400 staff were laid off, a handful of the worst-performing stores were closed, and a new plan was drawn up to sell the company as a going concern… but who the hell wants to buy discount non-food stores on British high streets which had been stagnating long before the political class decided lockdowns and energy sanctions were a good idea?
When the insolvency announcement was finally made, the establishment media offered every reason other than the obvious. The weather (the British summer has been a washout) had deterred people from shopping. Wilco stores were in the wrong locations. Wilco should have done more with its online store. These though, are secondary considerations which were as true prior to the lockdowns as they are today. They may have made Wilco particularly vulnerable. But the three things which killed Wilco – rising costs, falling demand, and central bank idiocy – are coming for the rest of the UK retail sector too.
Indeed, while Britain’s largest companies enjoyed more state largesse during lockdown, and continue to meet tighter bank lending standards, the small and medium sized enterprises which drive the economy and which provide most of the employment are already suffering.
Again, barely noticed by the leading media outlets, insolvencies in England and Wales reached record levels in the second quarter of 2023. Of 6,342 company insolvencies between April and June, 5,240 were creditors’ voluntary liquidations – the highest since records began in 1960 – and a further 637 were compulsory liquidations. Nor is there much hope for the future according to restructuring expert Colin Haig:
“The latest quarterly insolvency statistics provide a grim outlook for British businesses, with the lingering aftermath of the pandemic compounded by mounting debt burdens, supply chain disruptions, labour shortages, and rising input costs. Smaller businesses, in particular, have been hardest hit, struggling to cope with reduced consumer spending and restricted access to finance.
Also largely out of sight, unemployment – the indicator which the Bank of England is looking for before ceasing its rate rises – is beginning to rise again… at least at the margins. As Victoria Winckler, Director of The Bevan Foundation reports:
“It’s been quite a while since policy makers have worried about unemployment. But the latest unemployment figures suggest it is time to be concerned once again.
“In the middle of July, the Office for National Statistics (ONS) revealed that one in twenty people of working age in Wales, some 74,000 people, were actively looking for work but did not have a job. That’s a third more people out of work than just a year ago, and extra 18,000 people in the dole queue. The unemployment rate is now at its highest in eight years.
“At this stage it’s difficult to tell what’s behind the increase, partly because data on the wider economy lag behind the unemployment figures. But the swathe of recent plant closures must undoubtedly be a contributing factor. Indeed, the latest unemployment count comes before the closures – such as Zimmer Biomet (540 jobs lost), Avara Foods (around 400 jobs lost), Tillery Valley Foods (around 250 jobs lost) and redundancies at the Celtic Manor/ICC Wales (around 450 jobs lost) – take full effect.”
Wales, which is the weakest region in the UK, is something of a “canary in the mine” when it comes to the economy. Usually the last part of Britain to recover from economic downturns, Wales is also the first to experience economic shocks. And so, rather than see a handful of company closures and a few hundred lay-offs as a local difficulty, like the closure of Wilco, they are an indicator of a downturn wave which is about to engulf the entire economy.
This points to the fundamental flaw in the Bank of England’s approach to tackling inflation. Clearly, interest rate rises are having an effect. But which interest rate rise was responsible for the collapse of Wilco and the record number of voluntary insolvencies? Obviously, it wasn’t last week’s rise. Nor is it likely to have been the series of rises since April. Indeed, what we are seeing now may turn out to be the consequences of rate rises made a year ago… that’s the problem with using backward-looking indicators like company closures and unemployment to guide interest rate policy. Critics of the process liken it to trying to lift a brick with a strip of elastic – you pull and pull and pull, and nothing seems to happen, until one final pull and the brick flies up and knocks your teeth out.
The consequences though, may prove even more profound if the Bank of England loses control of interest rates. No doubt the assumption by policy-makers is that the next couple of quarters will be a mirror image of the ones we have just been through – indeed, with an election looming next year, the politicians will be desperate to see exactly that. In this fantasy scenario, disinflation (the slowing of the rate of inflation) kicks in and the rate of inflation falls back close to the arbitrary two percent target rate. A more plausible scenario is that the impact of rate rises on both consumer demand and especially on the rate of bank lending, will cause us to overshoot into a full deflation – not enough currency in circulation to support the economy.
Deflation is commonly misunderstood to mean falling prices. But insofar as this occurs in a deflation, it is short-lived, as companies follow Wilco’s administrators’ lead, and sell-off excess stock at bargain basement prices. The point though, is that once existing inventories have been sold, those companies that are left standing will cease ordering because demand has collapsed. This, in turn, means manufacturing will also take a hit. And eventually, even the energy and minerals whose shortage drove the inflation, will have to be cutback to meet the new, depressed level of demand.
In other words, deflation means widespread bankruptcy and high unemployment as discretionary sectors of the economy implode. And the reason prices don’t continue to fall is simply that by that time, you won’t be able to afford even the lower prices. So that a downward spiral of collapsing demand and more unemployment and business failure sets in.
At this point, the Bank of England will be expected to cut interest rates – something that inverted yield curves show that investors are expecting. Indeed, if the downturn is sudden enough and sharp enough, they may even do the previously unthinkable and set a negative interest rate. But this is unlikely to save the day in an import-dependent economy like the UK. This is because UK businesses and the British government still need to borrow foreign currency – usually US dollars – to continue to import.
It is extremely unlikely that foreign lenders are going to accept a low or even a negative interest rate to lend to a government which, quite clearly, lacks the tax base to service debts which are now more than 100 percent of GDP. And so, the Bank of England would be caught on the horns of a dilemma – cut rates and you get an old-fashioned balance of payments crisis or raise rates and turn a sharp downturn into a full-blown collapse… and either way, your currency collapses.
As you made it to the end…
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