UK retailers to face a bleak decade

Ernst & Young Item Club predicts retailers will have to fight for shoppers' disposable cash for the coming ten years as household incomes will be mainly addressed to pay off debts. Spending on clothes and shoes is expected to recover in 2012.

Shops outside London will fare especially badly, according to the analysis from Ernst & Young’s Item Club, the economic think tank that uses the Treasury’s modelling as the basis for its conclusions. The think tank said there would be variations in the pace of consumer spending. Consumers in London and the South East will outspend the rest of the UK because they are more immune to public-sector cuts. Growth will be slowest in the North East.
 
The Item Club said consumer spending was set to remain below pre-recession peaks until at least 2013 but would then remain subdued for a further seven years. Goodwin added in this vein: "The squeeze on household budgets is only going to intensify this year, as the gap between high inflation and subdued wage growth continues to widen and we experience a second consecutive year of declining disposable incomes.
 
The think tank said efforts by consumers to reduce debt levels would also play a big part in slowing the economy. Retailers will consequently have to fight harder than ever for a share of shoppers' cash, it warned. Item said the ratio of household debt to income would fall from 157 per cent at the end of last year to 139 per cent by the end of 2014.
 
"Even [after 2013] consumers are going to be much more cautious in their spending habits, particularly once interest rates have started to rise and mortgage and debt payments spiral."

“Rather than splashing their cash, we are expecting consumers to keep a firm grip on their purse strings.” Andrew Goodwin, senior economic advisor to the think tank, summarized.
 
The report forecasts consumer spending will grow by 0.6 per cent this year and 1.3 per cent in 2012 as depressed wages and rising inflation puts the squeeze on households before rising to 2.2 per cent in 2013. It expects disposable incomes are expected to fall 0.1 per cent this year for the second successive time, a situation last seen in the Seventies, before growing by 1.4 per cent next year.
 
But Item warns this may be too optimistic, with interest rate rises, a lack of credit from banks and high commodity prices continuing to make consumers more cautious about spending. Item expects consumer spending to grow by just 2 per cent a year to 2020 compared with 3.3 per cent before the recession.