Inflation Risk For Key Gambling Markets
In GBGC’ ICE White Paper we provided an overview of the current state and risks for the global economy in 2011. It is perhaps apt to explore the prospects and risks in six of the larger gambling markets: the US and China (the two largest economies in the world), the UK and Italy (the two largest gambling markets in Europe), and France and Spain (two European economies which recently undertook a process of gambling regulatory change).

One risk that all these countries share to different degrees is inflation. The greatest worries are in emerging economies. So, China, with a current + 4.6% inflation rate, an overheating economy and still feeling the hangover of a very loose monetary policy, is the country which will need to apply all the necessary brakes to stop inflation from getting out of control.
Rising commodities and energy prices will also affect the other economies and they can expect those rises to work their way through the supply chain as 2011 progresses. Inflation delivers pernicious effects, the main being that it eats away customers’ purchasing power, and it also makes investment decisions difficult to take as central banks are compelled to raise interest rates in an effort to control it. 

The governor of the Bank of England is currently in this difficult predicament: inflation is running at 3.3% (retail inflation at 4.7%), but on the contrary from China and the US, which in the last quarter of 2010 grew by 9.8% and 3.2% respectively, the UK GDP actually shrank by 0.5%.
For the UK land-based gambling operator the market is tough. Rising costs are hitting the business in two ways. The customer has less to spend as income and the business is facing rising costs.
As the “Great Depression” of 2007-2009 demonstrated, and contrary to popular belief, the gambling sector is not immune to recessions. Even in the gaming powerhouse of Macau, 2009 was a tough year as the economies in neighbouring provinces like Guangdong suffered. In the US GDP per capita declined by 3.3% between 2007 and 2009 and Gross Gaming Yield per capita declined by 1.8%. 
GDP growth is forecast to grow in all the 6 economies under consideration but what 2010 has shown is that the mild recovery in the US, UK, France and Italy did not bring jobs with it.
For 2011 job creation in the private sector will be the main challenge for developed economies. President Obama is counting on the unemployment rate falling if he is to keep his own job in 2012. Spain’ unemployment stands at an alarming 20.1%, one of the highest in the developed world. Italy and France’ aggregate unemployment numbers (8.6% and 9.7% respectively) hide a more troubling youth unemployment rate, which currently stands at 29% and 21.5%.

For gambling operators, these figures are concerning because people can only spend what they have in their pocket and with some countries reaching such high levels of unemployment the growth in revenues will be all the more difficult to achieve.
Markets are going to be competitive and margins tight.
Although much is said about Macau and its reliance on the Chinese gambler, the reality is that the Chinese citizen is finding life tough at present. Shops are marking up prices every week as inflation takes hold and tensions are bound to rise as we have seen in Egypt and Tunisia.
However, the most striking feature of the aftermath of the 2007-2009 crisis is what started as over-indebtedness of the private sector in the West (especially by banks and homeowners), has now become a public debt. The widespread budget deficits are a testimony to this, and the sovereign debt crisis of 2010 is the most prominent consequence how public deficits and debt can cause the markets to take fright. What is more, the underlying factors that have caused the sovereign crisis to erupt have not gone away, making 2011 a difficult year to navigate for European policymakers.
That is why various governments are trying to close their deficits by implementing, as in the UK, the most drastic public expenditure cuts since World War Two. 
The day of reckoning for the US to face its budget deficit is also pending.
France and Italy cannot use the public purse to fast track growth, as they have done in the past. Italy cannot devalue its currency to spur export growth because it is now a member of the Euro. So what other alternatives have governments got left? Tax rises.
Operators in the gambling industry cannot have failed to notice the rush of the US, UK, Italian, French and Spanish governments to regulate or to tinker with existing gambling regulation, particularly regarding Internet gaming and gambling. As Italy has demonstrated with tax revenue of €9.9 billion for 2010, there is money to be made for the tax man by milking the gambling and betting industry. But as the old saying goes, you are supposed to get milk out of the cow, not blood.