Merryn's Blog

Three reasons to worry about the UK consumer

The worst British recession in around 90 years is over, says the National Institute of Economic and Social Research. But don't be fooled. Here are three reasons why 2010 will be hard work for both consumers and retailers alike.

The worst British recession in around 90 years is over, says the National Institute of Economic and Social Research (NIESR). Phew.

Many commentators have pointed to a quirk of this recession that partly explains why. The same fact explains how retailers such as Tesco have managed to enjoy a pretty good Christmas: consumers have kept spending.

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But don't be fooled. Here are three reasons why 2010 will be hard work for both consumers and retailers alike:

1. Lack of job security

In a recent survey by the Association of British Insurers, just under a third of people said they expect the economy to get worse rather than better in 2010. That's up from 22% for the three months to the end of September. People are still losing their jobs, or know someone who has or is about to. And 31% of those surveyed are more worried about their jobs than they were three months ago, up from 27% in the third quarter.

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Ironically, a short economic upswing would make matters worse- new bosses in businesses with high fixed costs can quickly- but only temporarily - improve profits quite dramatically by cutting those costs hard. And banks that have resisted the urge to foreclose on businesses during a steep downturn (fearing they won't get much back if they do) may get bolder about it in the coming months. So expect more pain on the jobs front.

2. Adrop in consumer spending

Several commentators have pointed out that this recession is different from some of its predecessors because businesses, rather than consumers, retrenched hardest. However, that quirk may be ironed out soon.

The same ABI survey revealed that 42% of people are trying to clear unsecured debt, up from 34% a year earlier. Meanwhile, 37% see themselves as savers whilst just 31% see themselves as spenders.

Neither figure bodes well for consumer spending in 2010, especially as government initiatives such as the car scrappage scheme will soon be, well, scrapped.

3. Tax

Whether it be windfall taxes on bankers' bonuses and an increase in the highest rate of income tax to 50%, or the reversal of the cut in the VAT rate, or forthcoming rises in national insurance rates, we are all going to feel a lot poorer soon, courtesy of HM Treasury.

So, sure. On paper, we may be about to emerge from recession. But don't be fooled. The resilience of the UK consumer is about to be tested to the max. And that's why Christmas 2009 may have been the last hurrah for our retailers.

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