High Street recovery fears as PPI payments begin to drop off

Last week we reported some up-beat feel good news about how sales seem to be increasing and the High Street recovery might finally be happening. This week a story of doom has reached us, suggesting that a lot of the sales came from people who have found themselves flush after claiming back their mis-sold Payment Protection Insurance PPI from banks -a process which is now slowing down as the majority of people have settled their claims and the amount of gross payouts this year are expected to be some £2.25 billion less than in 2013.

The latest news report in the Independent suggests that the high street will be hit by a ‘spending drought’ – right after retailers including Currys PC World, John Lewis and Argos have just finished celebrating the previous six months as one of their strongest sales periods in a while for white goods and electricals – could it really be a flash in the pan?

According to recent figures from  the Office for National Statistics, retail sales in other sectors are  also growing at record rates but now experts are suggesting that this boost was due in part to the extra £12.5 billion paid into the economy by banks who had mis-sold PPI to their customers and that this will soon fizzle out as some 70% of payments have now been made – and wages continue to rise below the rate of inflation.

Retail Expert , Paul Turner-Mitchell, asserts that PPI payments during the first 10 months of 2013 totalled around £4.7bn, and during this time the Office for National Statistics’ Retail Sales Index found real term spending was up by £1.03bn:

“With the average payout pushing £3,000, undoubtedly, the compensation is providing some respite for households where real income has fallen. By definition these are usually lower income families.

“Given that 70 per cent of PPI payments have now been awarded and paid to claimants, consumer spending will soon be losing a powerful stimulus.”

Retail analyst Matthew McEachran, agrees:

“Since autumn 2012 we have been flagging the benefits of PPI windfalls on expenditure. The magnitude of the payouts, and the likely bias towards middle-aged consumers in mid-to-low socio-economic groupings, led us to believe there would be a high propensity for the money to be spent. The fact of the matter, though, is that the gross payouts will be around £2.25bn less in 2014 versus 2013.”

Alongside increased spending on white goods and electricals, shoppers have also been buying more cars and holidays – and Hassan Jiva of MRH Solicitors – who specialise in PPI payouts suggests there is little doubt that the compensation has been used for such purchases:

“From what our clients are telling us…. and that spend ranges from white goods to new kitchens to family holidays.”

Business risk analysts suggest that retailers now face a long haul until Christmas 2014 and this will be hard enough for some, without the sudden loss of the artificial boost to consumer spending from PPI compensation.