Retail sector’s growth spurt is over – commerce and consumers face uncertainty

The impact of rising costs and prices started to be felt in the retail sector already at the end of last year when sales volumes stopped growing. The trend has continued even more sharply throughout the first half of the year, with preliminary data showing a 2.6 per cent decline in sales volume and a 3.9 per cent increase in turnover in euro terms in the first half of the year.

The Finnish Commerce Federation predicts that turnover in retail trade will decrease by almost 3 per cent this year and slightly more next year. The forecast is subject to both positive and negative risks.

“If economic growth in Europe stalls, the euro continues to weaken, China’s COVID-19 lockdowns continue or the impact of the war in Ukraine on energy prices is prolonged and deepens, trade could plunge worse than forecast. This would also cut employment in trade,” says Jaana Kurjenoja, Chief Economist of the Finnish Commerce Federation.

On the other hand, a more positive outlook is also possible.

“The rise in interest rates may remain more moderate than expected, the rise in raw material prices has already slowed down and energy availability may even be better than our worst fears,” says Kurjenoja.

Commerce warns of a price-wage spiral

The current inflation is eating into retail sales in different ways. First, rising prices for consumers’ biggest expenditure items – housing and mobility – leave little room for growth in trade or other consumer services. Second, the decrease in purchasing power is cutting sales. Third, customers are shifting their spending to cheaper products, and fourth, fears of inflation are scaring consumers and creating uncertainty.

“So far, price rises have largely been driven by external factors, which, when they pass, will also mitigate inflation unless we ourselves worsen and prolong the situation,” warns Kurjenoja.

The commerce is worried about a possible race between prices and wages, as the labour costs of different sectors, including taxes, are added many times over to the prices charged by the retail sector when it purchases products and services from other sectors.

Work taxation reduces purchasing power and raises prices

On average, more than half prices exclusive of VAT in the retail sector are domestic direct and indirect wage costs. Domestic wage costs are also the largest cost item in the prices of goods manufactured abroad.

“For example, 86 per cent of the cost of a shirt made in Asia can be domestic, and 65 per cent of that can be wage costs. The added VAT is therefore primarily used to tax work done in Finland,” says Kurjenoja.

Large nominal increases would further increase the share of wage costs in prices.

“Reducing the taxation of labour would reduce the impact of wage costs on prices, while supporting purchasing power,” says Kurjenoja.

The purchasing power of Finns is crucial to the development of commerce and services, as low purchasing power drives companies into fierce cost competition, reducing investment in business development and the creation of new innovations.

Improving purchasing power as a key objective of the next government

One of Finland’s major structural problems is weak purchasing power compared to the price of labour. Supporting purchasing power by reducing labour taxation should therefore be one of the main tax policy objectives of the current and next governments. Equal tax reductions, including for low-income earners, will be achieved through combined changes to the basic deduction, the credit for work income and the state income tax scale.

“Equal income tax cuts will ensure an improvement in purchasing power for all, while reducing the incentive traps for low-income earners,” says Mari Kiviniemi, Managing Director of the Finnish Commerce Federation.

Kiviniemi believes that we should not indulge in populist vote-fishing by proposing various individual tax measures for the sake of inflation but instead aim for reforms that will create efficiency and new jobs in the future.

Digitalisation of specialty goods trade must be promoted

One way to create efficiency in the economy is to reform the pharmacy system in a responsible and safe way, starting from the needs of customers and not individual pharmacists. The dismantling of the alcohol monopoly must also continue.

“The previous alcohol reform has already shown that increased competition benefits the consumer and does not pose a threat of collapse for society and public health,” Kiviniemi says.

Domestic specialty goods trade and brands have significant potential for growth and internationalisation. Promoting digitalisation and internationalisation in specialty goods trade does not necessarily require large business subsidies but, above all, an increase in know-how.

“There is already a fixed-term e-commerce development programme funded by Business Finland. We now need to create a more permanent programme that would allow more companies at different stages of development to participate,” Kiviniemi suggests.

*Inflation-adjusted turnover.

For further information, please contact:

Jaana Kurjenoja, Chief Economist, Finnish Commerce Federation, tel. +358 (0)40 820 5378, jaana.kurjenoja(at)kauppa.fi
Mari Kiviniemi, Managing Director, Finnish Commerce Federation, tel. +358 (0)50 511 3189, mari.kiviniemi(at)kauppa.fi