A modern take on austerity

Official data shows record declines in spending, but higher retail sales. James Thompson finds out where British people are skimping

Household expenditure fell in the first quarter by the sharpest amount since 1980, a time when teenagers spent their cash on Adam Ant's latest album, shoppers agonised over whether to buy a Betamax or VHS video recorder and the Audi Quattro was arguably the most sophisticated car.

Nearly 30 years later, young people listen to Lily Allen on their iPods, download movies from the internet before they are released in cinemas and drive around in their parents' "Chelsea tractors", but the wider trends in the economy are similar: economic output is tumbling, unemployment is rising and consumers are cutting back on all but essential spending.

In real terms, household expenditure fell by 1.2 per cent in the first quarter of 2009, compared with the previous quarter, but this was 2.8 per cent lower than the same quarter last year, the Office for National Statistics revealed yesterday. It cited "significant falls" in spend on housing, household goods and services, and spending abroad, as it revealed that gross domestic product tumbled by 1.9 per cent in the first quarter – the biggest fall since the third quarter of 1979. This means that the UK's economy has shrunk by 4.1 per cent since the first quarter of last year.

However, in terms of household expenditure, the reality is far more complex than consumers parking their sports cars in Aldi's car park, families holidaying in Cornwall rather than the Maldives and taking their kids out of private school. A large proportion of the working population is relatively flush with cash compared to 12 months ago, given that monthly mortgage payments, energy bills and petrol prices have tumbled. Other ingredients in the house expenditure cocktail are rising unemployment – and fear of it, as well as increased savings ratio for those still in work.

Jeremy Rance, a retail consultant, says: "The likelihood of unemployment for people is relatively low, but the cloud of uncertainty means they are being more cautious."

In the retail sector, store groups that are linked at the umbilical chord to the dire housing market have found life the hardest. Richard Hyman, the strategic adviser in Deloitte's corporate finance department, says: "It is definitely housing market-related. The number of people moving house has plummeted." Gavin George, the head of retail at the accountancy firm Ernst & Young, said that furniture, carpet and sofa retailers are faring the worst, followed by the electricals chains and then to a lesser extent the DIY retailers. In clothing, value fashion retailers such as Primark, Peacocks and New Look are thriving, but in the middle-market, Marks & Spencer and Next are struggling.

However, the typical UK shopper is a resilient beast and UK retail sales have held up relatively well this year. Mr George says: "This year it has been surprisingly good. Around Christmas time people were expecting Armageddon but it has not been that and some stores are doing well." On Thursday, the Office of National Statistics said the volume of retail sales rose by 0.9 per cent in April, more than the 0.5 per cent expected by economists. The recent warm weather and later Easter has buoyed fashion retailers and DIY retailers.

While the ONS did not provide a detailed breakdown of household expenditure yesterday, data from the final quarter of 2008 revealed the sharpest fall in seasonally adjusted spending was on education. In other areas, people also cut their spend on health, restaurants, hotels and food and drink.

In the travel sector, Europe's two biggest tour operators, TUI, which owns Thomson, and Thomas Cook, have provided a wealth of illuminating data recently about how UK customers are cutting back on City breaks, taking fewer holidays in euro-dominated countries and increasingly seeking out package or all-inclusive holidays, which helps them to control their spending. Chris Lee, the head of travel at Barclays Commercial Bank, said: "The city break market has been poor. People have cut out their non-essential and ancillary trips and to some extent that has had an impact on the skiing market, as this is a second holiday for most people."

James Ainley, an analyst at Panmure Gordon, says that uncertainty over jobs has been a key driver of consumers booking summer holidays later this year. British people are also cutting back on splashing the cash when on foreign soil. "Anecdotally, overseas hoteliers are saying that, 'UK tourists are spending less money'," says Ainley.

In the restaurant sector, consumers are also cutting down on expensive meals out. Paul Hickman, the analyst at KBC Peel Hunt, says: "I think we have moved to an economy where there is an endemic expectation of a bargain. People are still eating in restaurants, but only if there is a special offer available."

People are also topping up their savings, as an insurance policy against potential redundancy. In fact, the fear of unemployment, along with lower household bills, will contribute to the savings ratios rising to 5.2 per cent this year, according to Verdict Research. Mr Rance says: "As a nation we are hunkering down... and waiting for the storm to pass."