1 in 5 UK households see reduction in income in 2011

 Consumers are making significant cutbacks in their discretionary spending as unemployment, inflation and depressed wage growth take a bite out of disposable income.

Deloitte’s Consumer Tracker, a new regular monitor of consumer confidence and spending habits, has found that one in five households have seen a reduction in income in the last quarter as a result of unemployment, loss of bonuses, reductions in overtime and increased part-time working.

Some 7% of households have seen someone lose their job in the last quarter, while consumers are bearish across a range of indicators with 53% of respondents pessimistic about disposable income, while 28% felt negative about their personal debt and 23% about job security.

Ian Stewart, chief economist at Deloitte, said: “A fierce squeeze on disposable income and high levels of macroeconomic volatility pushed the consumer sector back into recession in 2011. The UK has generated far higher levels of inflation over the last year than any other industrialised nation and this has hit consumer spending power. Inflation should fall sharply in 2012, bringing some relief to hard pressed consumers. But with unemployment heading up, credit in short supply and the economy in a fragile state we would expect household spending to increase only modestly in 2012.”

In response, consumers are cutting back across all discretionary categories: 41% are spending less on entertainment (cinema, theatre, concerts), while 36% are spending less on clothing and footwear, 28% on furniture and homeware, and 28% are cutting back on holidays. In contrast, inflation is driving up the cost of essentials with half of all respondents spending more on utility bills, 44% spending more on food and 37% spending more on transport costs.

However, Deloitte’s modelling work using Google search trends indicates that reductions in total expenditure in categories such as clothing is coming about through consumers buying cheaper items rather than buying fewer items. Initial search figures indicate that volumes are flat rather than falling in the fourth quarter of the year.

Nigel Wixcey, UK head of consumer business at Deloitte, said: “Discretionary spending has been hit hard in the past three months. Consumers are adapting their behaviour to the current economic environment by trading down, staying in and postponing the purchase of big-ticket items. However, whilst this is negative overall, it still presents opportunities to certain companies such as those providing subscription television, DVD rentals or takeaway food. Consumers are telling us they are deliberately making fewer impulse or spontaneous purchases. People are being forced to prioritise their spending habits.”

The outlook for the next three months is no better. In addition to making significant cutbacks, consumers are also indicating that they intend to save more of what is left of their disposable income to protect against even tougher times to come. Some 13% of consumers intend to pay more money into a savings account in the next quarter whilst the same proportion intends to reduce their reliance on credit cards.

While consumers are spending less on the total cost of their holiday, many are reluctant to give up their summer break entirely with 12% intending to book in the next three months. Electrical equipment also remains popular with 10% of consumers intending to make a major purchase in the next three months. However, this is a sector which has continued to see price deflation which may explain why consumers are more willing and able to spend.

Consumers across the country were pessimistic across a range of economic indicators, but those in London appear to have been sheltered to some degree. Some 45% of respondents were pessimistic about their disposable income compared with around 55% of respondents elsewhere in the country. Similarly, Londoners were more optimistic about their career prospects with 15% positive about job opportunities or career progression compared with 11% of people outside of the capital.

Wixcey said: “While some groups are demonstrating greater resilience than others, our research shows that the squeeze is being felt by the vast majority of UK consumers which presents an enormous challenge to all consumer businesses.”