Figures out this month show families are avoiding big ticket retail items and experts point to higher mortgage rates for the cautious spending
The era of spend, spend, spend is coming to an end. Britain's shoppers, who for years have been racking up debt on credit cards and home loans with abandon, are finally starting to cut back on their expenditure. A slew of economic and retailing figures this month suggests that families struggling to pay higher mortgage payments are becoming more cautious about the property market and shying away from "big ticket" purchases such as sofas and televisions. In the past few days, some of country's leading store chains, from French Connection to Next, have warned of tougher times to come for the high street, wiping millions off City forecasts. And the retail industry is already predicting that Christmas will be a wash-out.
Concerns that homeowners, who are already struggling after five interest rate rises in a year, will have to rein in their spending intensified yesterday when Abbey increased its base rate for new tracker mortgages. Today, in a further sign of the pressure on mortgage-payers, a survey from the Royal Institution of Chartered Surveyors (Rics) reports the first fall in house prices for almost two years. Although still buoyant in London, prices tumbled in East Anglia, the West Midlands and the north-west of England last month. There have been months of global economic turbulence, not least in the financial markets, where the sub-prime mortgage collapse in the US has destabilised stock markets and triggered a credit crunch.
The primary reason for the consumer slowdown here, say experts, is the Bank of England's decision to raise interest rates in July to a six-year high of 5.75 per cent. Houses are the least affordable they have been for a decade because of rising prices and rising interest rates. Borrowers with variable rate mortgages are paying an average of 7.6 per cent -- the highest since 1998. Ian Perry, a spokesman for the Rics, said: "Potential house-buyers have become far more cautious as they wait and see what effect interest rate rises will have on household finances. Affordability is at its most stretched in more than a decade and many will worry that rising mortgage repayments will prove a step too far."
Britons now owe a collective £3,345bn -- more than the country's gross domestic product. This week, the Citizens Advice Bureau disclosed that debt cases have jumped by 20 per cent in the past year to a record high. Amid the difficulties, the British Retail Consortium warned that 2007 could be the hardest year for the £250bn-a-year retailing industry since 2000. According to a BRC report this month, retail sales grew by only 1.8 per cent in August as people cut back on buying furniture and homewares. Shoppers were becoming more cautious about committing to big purchases and heavy discounting was often needed to persuade them to buy, added the BRC.
Meanwhile, demand for consumer services, such as travel, leisure and personal care, fell this summer, said the Confederation of British Industry. "A combination of higher household borrowing costs and poor weather has put a dampener on consumers' spending over the last three months and on travel and leisure in particular," said the CBI's chief economist, Ian McCafferty. Some retailers will do well, regardless of any slowdown. John Lewis, for example, is expected to report strong figures to the City this morning. But many leading names have been experiencing difficulty. On Tuesday, JJB Sports forecast that its sales would be down by almost a third, which sent its share value plummeting.
City analysts looked to slash their predictions for French Connection after tough trading conditions in the summer when, according to its chairman and founder, Stephen Marks, "it went a bit pear-shaped". Next is quadrupling its marketing budget and planning its first TV advertising campaign to ensure customers keep visiting its shops. Yesterday, the nation's biggest household goods group, Home Retail, said profits at its Homebase DIY chain plunged because of poor weather this summer and warned about future trading. Other retailers are experiencing a squeeze because of the economic slowdown, the poor weather, rising costs and the popularity of online shopping, which is forecast to surge by 30 per cent to £44bn this year.
Some smaller chains which are unable to cope could go out of business this winter, warned Kevin Hawkins, the BRC's director-general. "It could turn out to be probably the toughest year of the decade so far," he said. "It doesn't mean it's going to be a complete disaster but it's going to be on the lean side, unless we get an easing of rates, which is unlikely."
There was no sign of that in the submission by the Bank of England's Governor, Mervyn King, to the House of Commons Treasury Committee yesterday, when he defended his decision not to release more money to ease problems on world stock markets. "Five interest rates rises are beginning to bite," said Mr Hawkins. "As we saw in 2004 to 2005, when again we had successive interest rate rises, it takes time for these things to work though, but the effects are cumulative.
"As we said last year and before, some of the weaker players in the [retailing] market look to go out. Usually they are smaller and usually they don't have great brand equity."
Richard Ratner, a retail analyst at the stockbroker Seymour Pierce, said higher interest rates, council tax, fuel and transport bills were all hitting consumers while retailers were struggling with rent and rate increases, rises in the minimum wage, falling prices and stronger competition from the internet.
Looking forward, he added: "I think it could be really quite difficult."
'Interest rates and mortgage costs have forced me to think about my spending'
Daniel Filippi, 37
Hotel manager, Camden, London
"I usually spend a few hundred pounds a week and this year I'm still spending that amount. Most of my shopping is done on the internet. I don't see the point in travelling to the shops when I can order the exact same things online and have them delivered."
Aaron Jordan, 23
Sales assistant, North Finchley, London
"The shops just haven't been as busy this year and when people aren't coming through the doors, money isn't going through the tills. I think the weather has a lot to do with it."
Angela Gray, 44
Cabin crew, Cambridge
"Interest and mortgage rates going up have definitely made me think about my spending. I've got less money to spend. I rarely shop in Britain. I tend to do most of my shopping when I'm in America. It's much cheaper."
June Walerman, 66
Retired social worker, Islington, London
"My generation have never tended to spend much. My daughter and her friends are big spenders, but I've noticed they haven't been spending as much this year."
Hassan Ahmed, 21
Student, Holloway, London
"I have not spent as much this year. I'm a student and have a tight budget. When I do shop I do it all on the high street. The streets are emptier this year and I've wondered if the threat of terrorism has anything to do with it."
Deborah Hartzberg, 20
Student, South Woodford, London
"My spending is pretty much the same as it has been in the past few years, although I'm a student so my spending is limited anyway. I only buy the things that I really need."