The leisure economy - where to in 2008?

Happy New Year? Not if you've been reading the Financial Times. The newspaper's The World in 2008 supplement of 23rd January carried the headline "Alarm flags litter the globe" with Quentin Peel highlighting several causes of "an extraordinary degree of uncertainty" for 2008:

• Two presidential elections: the USA and Russia (to which we could add the shaky politics at the top in France and Italy)
• The Olympics in China, which will celebrate the country's economic boom but which will also raise the spectre of new, globalised industrial powers creating even more pollution, heightening the fears of voter/consumers in the West
• Deepening unrest in the Middle East and Near East, spreading from Turkey to Pakistan
• The threat of a "protectionist backlash" against globalisation, fuelled perhaps by population movements and even paranoia over the threat of international terrorism.

These political crises would not be helped by the global economy tipping into recession. In the same issue of the FT, George Soros, the controversial speculator, concluded in his column that recession in the developed world was "more or less inevitable" in 2008, precipitated by the credit squeeze in the USA.

Fifteen years have passed since Soros made a fortune speculating on the Pound but his opinion is still sought. After all, "Black Wednesday" (16 September 1992) pushed the UK further away from the European currency system and sounded the death-knell of the Conservative government. But Soros will be 78 years of age in 2008 and his prediction of "the worst market crisis in 60 years" does assume that a boom-bust mechanism still exists. After 15 years of economic stability, the UK economy, at least, appears to have moved away from that mechanism.

The irony is that Black Wednesday, now even referred to as "White Wednesday", saw the start of the UK's extraordinary period of stability. Low inflation and unemployment, fairly steady GDP growth and consumer confidence have become the norm with no immediate sign of a dramatic downturn to compare with past recessions.

The end of the old boom-bust cycle suggests that the UK economy has moved away from the threat of wild GDP fluctuations, hyper-inflation, double-figure interest rates, mass unemployment and General Strikes that occurred in the 20th century. Leisure Research would argue that three important socio-economic changes have taken place over the last 15-20 years:

• Globalisation: specifically meaning the sourcing of goods outside the UK, hence the decline (in some industries, the near-demise) of domestic manufacturing. How can prices of T-shirts or apples be hyper-inflated if a dozen countries are lined up to compete for a piece of the UK market? [see also The Price Is Right, posted September 2007]
• Fragmentation: the shift from farming, mining and manufacturing to service industries makes it harder to develop the social consensus that can lead to political (hence, economic) action
• Depoliticisation: the boom-bust cycles were exaggerated by political actions by ideological governments. The party policies are harder to distinguish now, and that seems to suit a depoliticised voting public

In classical economics terms, more choice means more substitution and there is more flexibility than ever for consumers who are no longer tied down by old-fashioned allegiances to jobs or working lifestyles or by living in a particular area. The ICT revolution alone has provided much of this flexibility.

Belts may well be tightened in 2008 by the credit squeeze but, as regards the leisure economy, consumer priorities have changed. The rather bland assumption is often trotted out that leisure spending is part of a "non-essential" category that is vulnerable to downturn, i.e. consumers spend less on leisure items because they have to pay for essentials like housing, food and clothing. This is difficult to prove in the age of lifestyle icons which consumers will now battle to maintain at all costs: their mobile phones, iPods, holidays abroad, the second car and so on.

It's Not a House, It's a Home

The big worry for most consumers in 2008 is not losing their jobs - it's much harder to dispense with service jobs than manufacturing ones - but seeing the value of their houses or flats go down. Again, the boom-bust cycle predicts that house prices must inevitably fall sooner or later. But once again, is that inevitability still there in a consumer economy where such a premium is placed on the home of Grand Designs and Ground Force?

The modern home is a long way from the economist's definition of "shelter" being one of the "non-discretionary" items for consumers. Home is where we spend our time online, with family and friends, maybe even drinking pub beer (from the Carlsberg Draughtsmaster), going to the movies (with the Philips Micro Theatre) or playing tennis (on the Nintendo Wii). Consumers can't and won't stop spending on leisure in 2008, however bad the downturn, but the vulnerable sectors are likely to be those which require moving outside the home, and many are becoming all too easily substituted by an in-home activity.

The price is right: leisure markets and inflation

There has been much debate in 2007 about the need to keep a grip on inflation. Energy prices, in particular, have increased and while the media focus is usually on household bills, higher energy costs have a big impact on leisure industries (the costs, for example, of heating and lighting swimming pools, football stadiums, hotels).

But the big story on prices must still be the extraordinary historic change in the UK economy since the early 1990s: the movement to an economy with seemingly permanent low inflation (i.e. under 5% a year), accompanied by low unemployment and other general indicators of prosperity.

Apart from the economic benefits of low inflation, there are psychological effects. Anyone under the age of 20 can only have been aware, in their lives so far, of living under a Blair-style New Labour government (just as there was a Thatcher Generation), and the memory of a high-inflation economy is a distant one (for the over-30s). But the psychology of pricing is a complex matter and it is human nature to feel that ‘things are getting expensive’, even in an era of low inflation.

To put this in context, a look back at the past is worthwhile.

1960s prosperity and stability: RPI +3.5%

Taking the general, long-running Retail Price Index (RPI) as the measure of inflation, the annual average in the 1960s was +3.5% although the highest rate of the decade was +5.4% in 1969, heralding the decade of oil-price inflation and general economic crisis.

1970s oil crises: RPI +12.6%

Average inflation in the 1970s was +12.6% a year, which seems extraordinary enough to today’s RPI-watchers, but the annual peak for the decade of +24.2% in 1975 alone seems almost bizarre from the standpoint of 2007’s ‘worrying’ increase to over +3%.

1980s recession and Thatcherism: RPI +7.5%

The 1980s had an annual rate of +7.5% although this average was influenced by the +18% rate for the first year of the decade. Thatcherite economics brought the rate down to a low of 3.4% by 1986, at the expense of high unemployment, but the RPI crept up again to reach an unsustainable +9.5% in 1990.

1990s stability under Labour: RPI +3.7%

Apart from 1990, the 1990s were a decade of modest inflation - and economic stability - for which both outgoing Conservative and incoming Labour governments can take some of the credit.

Leisure prices in the 2000s

Inflation has averaged at just over +3% so far in the 2000s (2000-2007) but prices are polarising. The averaged-out RPI (+20% in that period) is now a hotch-potch of varying price trends across sectors of the economy. At one extreme, energy prices for the household were up 73%, whereas clothing and footwear prices actually declined by 17%. (Within clothing, Women's Outerwear is cheaper in 2007 than it was 20 years ago, thanks to globalised sourcing and an ultra-competitive High Street.)

Leisure goods is another official category that has suffered deflation, not inflation, since 2000: a 20% decline in prices averaged across items such as toys and electronic equipment. Leisure services, on the other hand, are 33% more expensive than in 2000. In the leisure market, this means it has become much cheaper to stay home than to go out for leisure activities, exacerbating the underlying social trend towards ‘cocooning’ in the home.

There is no better example of this than the beer market, where the 2000-2007 period saw a 6% decrease in take-home (or ‘off-trade’) prices, whereas a pint in a typical pub or bar costs 24% more. Hence the argument that it is supermarkets, not pubs, that have fuelled binge drinking. The pubs have had to charge higher prices for beer to pay for improvements to their premises, including the provisions for disabled access, stricter health and safety and smoking bans that have affected all leisure premises.

Beer is by no means the only market affected by the in-home option for leisure being cheaper than ‘going out’. Cinema prices have increased steadily – partly to pay for more attractive multiplexes – but there are now so many options for watching a movie cheaply at home (maybe on a home cinema set-up, helping recreate the cinema experience). Eating out is more popular than ever, but the option of entertaining in the home around a table stocked with home-delivered food or supermarket ready-meals is also enticing more consumers, and once again the pricing balance is in favour of the home, with household food prices up 15% since 2000, but restaurant meals up 23%.