Shopping habits raise fears of a double-dip

Spending on groceries, normally the most resilient part of the retail industry, fell in January according to market researchers Nielsen.

Meanwhile, sales at discounters Aldi and Lidl showed their biggest rise since the depths of the recession in 2009.

Leeds-based Asda said that its monthly income tracker for December showed the biggest fall in family spending power since the series began in 2007.

Asda’s chief executive Andy Clarke said: “With Government measures to reduce the deficit beginning to bite, it’s unlikely there’ll be any let up soon.”

According to Asda, the average UK household had £172 a week of discretionary income in December 2010, 4.5 per cent lower than a year earlier.

Meanwhile, a tough market for household goods has deteriorated further since the VAT tax increase was introduced in early January, leading to recent profit warnings from electricals group Kesa and carpet seller Carpetright.

Charles Davis, managing economist at Cebr, said: “The picture for 2011 looks set to be equally tough for the consumer. The VAT increase in January will keep inflation elevated this year, while public sector cuts will start in earnest. As such, wage growth will remain modest. This is likely to result in lower levels of disposable income in real terms for families in 2011 compared to 2010.”

After a shock economic contraction in the final quarter of last year, due in part to weak consumer spending, every piece of bad news is expected to fuel doubts about the pace at which the Government is driving through austerity measures to slash its deficit.

“Recessionary spending is returning, and it’s going to get worse,” said Richard Hyman, strategic retail adviser to consultants Deloitte, arguing that consumers are yet to feel the full effects of the Government’s spending cuts.

“I think retailers have been warning of this and frankly I’ve been a bit astonished about some of the optimistic projections of economic growth out there, because I can’t see where it’s coming from,” he said, noting consumer spending has a much bigger bearing on GDP than manufacturing or construction.

The Government, and many retailers, blamed winter weather for lower spending in the run-up to Christmas.

While this was undoubtedly a factor, there are good grounds for thinking that underlying consumer demand is weakening too.

Commodity prices are rising, squeezing disposable incomes as shoppers put more money aside for petrol, fuel, clothes and groceries, while growth in wages is lagging well behind.

People are also worried about their jobs as the Government moves to slash public spending and there are suggestions the Bank of England could hike interest rates in the coming months to tackle rising inflation.

A survey by GfK NOP showed UK consumer confidence tumbled to its lowest level for two years in January, echoing the Asda findings.

Anecdotal evidence from retailers suggests this is starting to hit spending, although they are anxious not to talk shoppers into a recessionary mindset.

Kesa said underlying sales at its Comet stores plunged 10 per cent in the two weeks after VAT sales tax rose from 17.5 per cent to 20 per cent on January 4, while Carpetright said it had not seen an expected recovery in sales. John Lewis, which is seen as a bellweather for the retail sector, reported a small 1.2 per cent rise in sales in the week to February 5, which follows modest declines over the previous two weeks.

“This reinforces concerns that consumers are reining in their spending,” said IHS Global Insight economist Howard Archer.

“The John Lewis figures suggest that consumers are becoming increasingly less prepared – or less able – to spend as higher inflation and muted earnings growth squeezes their purchasing power.”

He added that this reinforces the suspicion that consumers will be very cautious in their spending in 2011 in the face of serious headwinds.

While retailers will be praying that shoppers don’t talk themselves into a double dip recession, the signs do not look good.

The next few weeks will be critical for Britain’s retailers.