Will Discounts ‘Save’ Christmas?

A strong decline in retail trade, realistically by 15.4 percent year-on-year, continued in Croatia in October this year, and analysts from Privredna banka Zagreb (PBZ) expect that the overall decline in retail trade during this year will remain at around 14 percent, while in the first half of next year they expect a continuation of the decline, albeit at more moderate rates than this year, and towards the end of the year a very slight recovery.

In the latest Weekly Analyses from PBZ, Ivana Jović cites several reasons why the analysts of that bank were not surprised by the data on the decline in retail trade of 15.4 percent in October this year compared to the same month last year. She notes that the low base effect of October last year had not yet been as strong as it will be in the coming months, so its statistical impact could not be significantly reflected in this year’s October data. Among some of the key factors that influenced the reduction in household consumption, Jović highlights unplanned expenses that households faced during August and September – the abolition of free school textbooks and a decrease in disposable income due to increased tax burdens.

"We must not forget that autumn, after the end of the tourist season, also brought the first significant increase in unemployment, and the absence of more decisive state anti-recession measures has prolonged negative expectations in the labor market for almost the entire next year," emphasize PBZ analysts. They also point out that in September, for the first time this year, a decline in real net wages was recorded on a year-on-year basis.

Expectations of the population have become more pessimistic, and consequently, there has been a postponement of consumption in anticipation of "better times" either in the form of retail discounts (short term – holiday spending during December accompanied by seasonal discounts) or in the form of the first more concrete signs of recovery (medium term – possible announcements of the abolition of the solidarity tax during 2010, stabilization of the labor market). Accordingly, PBZ analysts expect that the overall decline in retail trade during this year will remain at a double-digit level of around 14 percent, while in the next year, due to expected negative trends in the labor market, they expect a continuation of the decline in the first half of the year, although at more moderate rates than this year, and towards the end of 2010, they expect a very slight recovery in consumption.

In light of the above, analysts also raise the question of whether it is realistic to expect an additional two billion kuna in VAT revenue in 2010? They note that in the first two months of the application of the increased VAT rate (August and September), VAT revenues increased by 5.3 percent compared to the same two months last year, but also point out that August and September were expected to be the two months in which the smallest decline in retail trade was recorded this year (a combination of the tourist season and increased spending for the new school year)."Although we currently do not have data on how much VAT was collected during October, it can be assumed that the growth rate, in line with the renewed acceleration of the decline in retail trade, has decreased," conclude PBZ analysts.  (H)