'Decade of pain' on the High Street lies ahead

By Hugo Duncan for the Daily Mail
Updated: 04:20 EDT, 16 May 2011

High Street retailers face a decade of pain as the squeeze on family finances tightens, a hard-hitting report warns today.

Money worry: Shoppers will keep a firm grip on the purse strings

Soaring inflation, rising energy bills and subdued pay rises will leave households with less cash to spend, according to economic forecasting group the Ernst & Young Item Club.

this And with consumers struggling to make ends meet, many will 'keep a firm grip on their purse strings', causing misery for retailers.

Small independent shops, unable to compete in vicious price wars, will be particularly hard hit.

Andrew Goodwin, senior economic adviser to the Item Club, said: 'It is clear that the outlook for the consumer remains bleak.

'We are facing another 18 months of pain before wages can once again keep pace with inflation. UK retailers will need to be more resourceful than ever if they are to secure a share of our wallets.'

He said the situation will get worse when the Bank of England raises interest rates - which it could do far sooner than many expect.

The Bank's Governor Mervyn King recently warned that families face the biggest squeeze on their finances since the 1920s.

Workers have been hit by an unprecedented attack on takehome pay, from tax rises, record fuel prices and paltry wage increases.

In its special report into the outlook for UK consumers, the highly-respected item Club warns that disposable incomes will fall 0.1% this year - the first back-to-back decline since the 1970s, following a 0.8% drop last year.

Consumer spending - a key driver of economic growth - will grow by just 0.6% in 2011 and 1.3% in 2012, according to the report.

It means spending will not return to its pre-recession peak until 'at least 2013' with growth in spending 'subdued for a further seven years' as households pay off their debts.

The Item Club expects consumer spending to grow by an average of just 2% a year 125 to 2020 - well below the 3.3% increase seen in the decade before the recession.

Mr Goodwin added: '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.

'It will be 2013 before consumers are really able to start enjoying the recovery.

'However, even then 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're expecting to see consumers keeping a firm grip on their purse strings and continuing to pay back their debt.'

Mr King last week warned that Britain faces 'a difficult time ahead with a slow and prolonged adjustment to the consequences of the banking and financial crisis'. A host of high street names have already issued profit warnings and blamed tax hikes and fears over job security for keeping shoppers at home.

Music chain HMV, sports group JJB, babywear seller Mothercare and electrical store Comet have all raised concern about the gloomy conditions hitting shopping centres.

Steve Wilkinson, head of consumer products at Ernst & Young, said: 'The squeeze on consumer spending is going to accelerate some of the shifts we've started to see over the past few years.

'Shoppers are going to be a lot savvier about when, where and how they shop. They are becoming more price aware and so will be increasingly using comparison websites to find the best deals.'

He said many will shop more often but spend less each time they do, seeking out special offers and promotions.

He added: 'In a bid to appear to offer the best value for money, it's likely that retailers will continue with the deep discounting of iconic brands.

'This will be a major headache for brand owners ... who won't want to see their products being devalued.'