In December 2017, Europe was in the midst of a sustained period of strong economic growth. At the heart of this boom were consumers, driving domestic demand. Whilst the European economy remains on sound footing, consumer sentiment has fallen to its lowest level in almost two years as consumers have become more pessimistic about their economic prospects as inflation starts to eat away at their real incomes, which have seen only limited growth since the GFC. However, we believe that consumer spending will improve in 2019 as businesses start to invest more in labour to boost sluggish productivity. With unemployment in the Eurozone at its lowest level in over a decade at 8.1%, skilled workers are in a position to demand higher wages as businesses struggle to recruit new employees.
Investor caution is well warranted, but the sector should not be dismissed altogether. There will be retail destinations that continue to thrive, even in these tougher conditions. While retailers may require fewer stores in aggregate, having a physical footprint in key locations will only become more important. The locations that will continue to thrive will be those that have guaranteed sources of footfall. This could be because the location is where people live, where they work, or where they travel. Tourism has been a key support to major European high streets, and the chart illustrates the strong correlation between rental growth and visitor numbers. As retail sales are increasingly spread across different sales channels ‘brand equity’ will become even more valuable to retailers, and stores visited by large, international audiences can be a significant marketing tool in this context.