Economic Forecasts

Influence of

factor in 2007 on:

Factor Demand Margins

Summary Retail demand will be slightly stronger in 2007 than 2006. Consumer confidence has been boosted by falls in the price of petrol and a pick up in the housing market. With the wider economy growing healthily, employment and earnings will also gain ground, lifting disposable income and consumers’ retail expenditure. However the recovery could easily be derailed if US economic growth deteriorates or if inflationary pressures necessitate more than the expected one additional interest rate rise. Though retailers will benefit from lower operating cost inflation and a strong pound, the need for them to limit price rises will provide little relief to margins.

GDP Despite the recent increase in interest rates prospects are still promising for 2007 and GDP should grow by 2.9%, up from 2.7% in 2006. A fall in oil prices has made consumers feel better off and eased cost price inflation for businesses. Renewed house price inflation and equity prices look set to further underpin consumer confidence. Nonetheless risks to the economy remain – in particular a slowdown in the US could impact investment and exports in the UK. –

Earnings / Disposable Income Rising inflation has put upward pressure on wage settlements, while improved corporate performance has led to a record round of City bonuses. In 2007 earnings growth will reach 5.1%, its highest for nine years, representing a major opportunity for retailers. Real household disposable income will be lifted by a fall in petrol prices, though this gain will be counterbalanced by higher mortgage and debt costs.

Employment

Though unemployment rose in 2006, the fundamentals of the labour market are promising. Stronger economic growth will reduce unemployment in 2007, which will underpin consumer spending. Immigration from eastern Europe is also boosting the quality of the workforce, enabling retailers to recruit more motivated staff. –

Inflation CPI inflation has been consistently above target since Summer 2005, driven up by energy and petrol price increases and this has reduced the rate of price cutting in retail. In 2007, higher interest rates should temper inflation though it is unlikely to dip below target until 2008. Retailers will benefit from lower cost inflation but fierce competition will limit the scope for them to raise prices.

Exchange Rates

The value of sterling will be underpinned by higher interest rates in 2007 so long as inflation falls as expected. Sterling’s strength against the dollar will enable retailers to import dollar priced goods cheaply from the Far East which will help them to limit price inflation. –

Interest Rates

In a surprise move in January