Squeeze on shoppers to keep high street down for decade

The next two years will be particularly tough as depressed wage growth and rising inflation will suppress spending.

In a special report, the Item Club says spending will only rise by 0.6 per cent this year and 1.3 per cent in 2012 before hitting 2.2 per cent the following year.

Even those forecasts could prove optimistic, the economists warn, with several "downside risks" including the threat of higher commodity prices, interest rate rises, a lack of credit and a further decline in confidence.

With disposable incomes set to fall further this year, by 0.1 per cent, shoppers will be "reluctant to loosen the grip on their purse strings", the report cautions.

Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club, said: "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."

The Item Club argues that retailers will have to fight "harder than ever" for a share of shoppers' cash and there will be both winners and losers. Spending on technology such as mobile phones, games machines, Blu-ray players and other gadgets has held up well throughout the recession, but hotels and restaurants are in for another rough ride as shoppers once again revert to supermarket deals.

Steve Wilkinson, the head of consumer products at Ernst & Young, said: "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."

The report comes ahead of official retail sales figures this week.

Although the figures for April are expected to show a 1 per cent month-on-month increase in sales volumes, economists are urging caution as retailers will have benefited from the later Easter, improved weather and the royal wedding last month.

IHS Global Insight economist Howard Archer said: "While welcome, any spike up in retail sales in April should not be taken as a sign that the consumer is roaring back to life.

"What it would suggest is that pressurised consumers need a particularly favourable set of circumstances to part with their cash. And we suspect that consumers are likely to keep a tight grip on their purse strings over the coming months."

In a sign of the pressures beating down on the high street, Mothercare is expected to reveal a 13 per cent slump in annual profits on Wednesday and analysts expect it to increase its rate of store closures.