Retailers fear tough year as VAT goes up and spending cuts kick-in

Thousands of shoppers went on a spending spree at the weekend to hunt for bargains in the January sales and beat Tuesday's VAT rise, but retailers fear consumers will soon be tightening their belts.

Last year proved difficult for many, despite the end of the recession, but 2011 could be tougher still. VAT is rising from 17.5% to 20%, the full impact of the government's spending cuts will be felt and job losses are predicted across the economy. Economic growth is likely to slow sharply in the first half of 2011 and unemployment could climb from 7.9% to 8.4% by the end of the year.

The VAT rise will add an estimated £158 a year to essential bills for the average household, according to research by uSwitch.com. Consumers are already struggling with rising utility bills as well as higher food costs on the back of soaring commodity prices which have affected basic items such as bread and sugar. Clothes prices are also going up due to increases in the cost of overseas labour and raw materials such as cotton.

Research from the price comparison site Gocompare.com suggests that seven out of 10 Britons will think twice about making big purchases, such as a car, in 2011. The survey of 3,000 UK adults also showed that almost two-thirds expect a very difficult year financially, with 22% stating that the biggest financial worry in the new year is the rising cost of living and bills.

Many people have already put off big purchases over the past year. The economic uncertainty has meant that more than a quarter have avoided moving house, a fifth have put off buying a car and nearly a third have forgone a foreign holiday.

Job security in 2011 is also a big worry for a large proportion of the adult population, with 31% saying they fear losing their job or not being able to find enough work.

A spokesperson for Kingfisher, owner of the DIY chain B&Q, said: "We're expecting 2011 to be tough, particularly in the first half, with some recovery towards the end of the year. We are more optimistic about 2012."

David Barford, director of selling operations at John Lewis, said: "You come out of Christmas, you open your Christmas bills and VAT goes up – we're going to see a few weeks where people will take a breather.

"The austerity cuts and VAT hike are going to bite, undoubtedly. Financially it's not a huge hike but everybody is talking about it and it will have a big psychological impact." He is confident that the department store will have a "reasonable" year given its strong brand.

Source : Julia Kollewe - Guardian.co.uk