Retailers face tough decade as consumers feel squeezed

Consumer spending will remain below its pre-recession peaks until at least 2013, and growth in spending will remain constrained for another seven years, economists using the Treasury's own economic model for the UK economy will warn in a new report published this morning.

The Ernst & Young Item club said the high street faces a "difficult decade" as depressed wage growth and rising inflation conspire to limit consumer spending growth to just 0.6 per cent this year and 1.3 per cent in 2012. Spending is expected to grow by 2.2 per cent in 2013 – but the Item Club warned that growth over the decade to 2020 is expected to average just 2 per cent a year, down from the 3.3 per cent rate in the decade before the recession.

It also warned that that the forecasts could fall prey "a number of downside rises," including interest-rate rises and the persistent lack of credit availability.

"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 to enjoying the recovery," the group's senior economic advisor, Andrew Goodwin, said.

"However, even then consumers are going to be must more cautions in their spending habits, particularly once interest rates have started to rise and mortgage 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."

The warning – including the forecast for another fall in disposable incomes this year, a situation last seen in the 1970s – chimes with comments from the Bank of England Governor, Mervyn King, who earlier this year said households were facing the longest squeeze in living standards since the dark days of the 1920s.

The Item Club forecasts point wide variations in the spending picture across the country. London and the South of England are likely to continue to "significantly outspend" the national, as they are expected to prove more resilient to public spending cuts. The South also benefits from better employment prospects.

That said, consumer spending in London, which is expected to increase by 1.5 per cent this year and by 1.7 per cent in 2012, is only forecast to climb to pre-recession levels in 2013. Spending in the North-east, on the other hand, is expected to grow by 0.3 per cent this year.