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The UK high street faces a difficult decade, with consumer spending set to remain below pre-recession peaks until at least 2013 and growth in spending to be subdued for a further seven years, as households focus on paying down debt, according to the Ernst & Young ITEM Club.

In a special report released yesterday, the Ernst & Young ITEM Club says that depressed wage growth and rising inflation will see consumer spending grow by just 0.6% this year and 1.3% in 2012, before rising to 2.2% in 2013.

But ITEM warns that there are a number of downside risks to this forecast, from pending interest rate rises, to lack of credit, and a further decline in confidence, as well as the threat of higher commodity prices – all of which mean that cautious consumers will be reluctant to loosen the grip on their purse strings.

ITEM Club expects consumer spending to grow by an average of just 2% a year to 2020, compared to 3.3% in the decade prior to the recession. Disposable incomes are predicted to fall again this year, by 0.1% – a situation last seen in the 1970s - before growing by 1.4% in 2012.

Consumer squeeze set to intensify
Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, comments: “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.”

ITEM expects the household debt to income ratio to edge down from 157% at the end of last year, to 139% by the end of 2014.

Strongest growth in consumer spending expected in the South
While all consumers are going to feel the squeeze, ITEM Club says there will be variations in the pace of consumer spending growth across the UK. According to the report, Londoners and those living across the South of England will continue to significantly out-spend other areas of the UK, due to a greater resilience to the public sector spending cuts and better prospects for employment. However, even in London, it’ll be 2013 before consumption is back to pre-recession levels.

ITEM Club has forecast that consumer spending in London will increase by 1.5% this year and 1.7% in 2012. This compares to growth of just 0.3% and 0.9% for this year and next in the North East; and 0.8% and 1.2% growth in Wales.

But Goodwin warns that rapid growth in house prices over the decade prior to the financial crisis has contributed to households in the East, South East, and South West regions running up some of the highest debt-to-income ratios in the country. As such, while consumer spending in these regions is likely to be stronger than in the North, they will still lag behind London, where incomes are higher and household balance sheets less strained.

High tech goods top consumers’ shopping lists
With less cash in our pockets, ITEM Club says that retailers will have to fight harder than ever for a share of our wallets, and that there will be winners and losers on every high street.

While all consumers across all parts of the income scale have been tightening their belts, spending on audio-visual goods – such as flat-screen TVs, blu-ray players and gaming machines – and mobile phones has held up well, even during the recession. ITEM Club expects retailers in these Recreation & Culture and Communications sectors to continue to see the biggest increases in consumer spending, growing by 5% and 4.6% respectively this year, and 4% and 3.9% in 2012, driven by falling prices and the lure of new technology.

Spending on Clothing & Footwear is also expected to recover in 2012, after two difficult years, alongside Transport, as the squeeze on discretionary spending, such as cars and the sharp rises in oil prices begins to relent.

In contrast, the UK consumer is more likely to take advantage of supermarket meal deals than eat out, or take sandwiches to work rather than purchasing a take-away from the local cafe. The report shows that the poorest performers will be sectors that are highly income elastic, such as Hotels & Restaurants, which will see spending fall by -0.7% this year before rising to 0.2% in 2012. This sector should benefit from a boost in tourism during the Olympics, but it will only be temporary and will merely mitigate the domestic weakness.

Retailers and brand owners face a difficult year
Steve Wilkinson, head of consumer products at Ernst & Young, says: “The squeeze on consumer spending is going to accelerate some of the societal shifts we’ve started to see over the last 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 we’ll be increasingly using comparison websites to find the best deals. They’ll also be shopping more often, but spending less on each visit, and will be scouring the shelves for special offers and promotional items.

“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, whose margins will be under pressure and who won’t want to see their products being devalued through heavy promotions in the supermarket price wars.”

Battle lines are drawn for a share of consumers’ wallets
Goodwin concludes: “It’s clear that the outlook for the consumer remains bleak; we’re 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.”

Read the full ITEM Club special report  (484K May 2011)