Why UK retailers could struggle until 2020

British retailers have been battling sluggish sales for months, and now new data suggests that weakness in the sector could persist for years, as consumer spending declines steadily until 2020.

Real consumer spending growth is expected to remain relatively robust at around 2.3 percent in 2015, before cooling to only around 1.7 percent per annum on average in between 2016 and 2020, according to PwC's latest UK Economic Outlook.

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Customers look for groceries as they push shopping carts along the shopping aisles inside an Asda supermarket in London.
Simon Dawson I Bloomberg via Getty Images
Customers look for groceries as they push shopping carts along the shopping aisles inside an Asda supermarket in London.

U.K. retail sales were flat in October, when compared with like-for-like sales the same time a year ago, the British Retail Consortium (BRC) and KPMG said on Tuesday. This after sales in September fell to levels not seen since December 2008, as food and clothing sales continued to decline.

Consumer spending growth has been relatively strong for the past two years despite weak wage growth, PwC said, due to strong employment growth and rising house prices, which is in turn reflected in a falling savings ratio.

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But there are limits to how low this ratio can go, meaning real consumer spending growth is likely to slow down dramatically from 2016 onwards, the group said.

The shares of consumer spending on food, alcohol and tobacco are projected to continue to decline until 2020, along with spending on transport, the report found.

"Looking ahead, we expect the savings ratio to continue its downward course in 2015 before stabilising in the medium term as it approaches pre-crisis levels," chief economist at PwC, John Hawksworth, said in a statement.

"This slowdown in spending growth will only increase the pressure on retailers already hit by fierce price competition and the disruption to business models from the ongoing shift to online sales."

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Beyond retail, however, the U.K. economy looks in good shape, the group said. It projected gross domestic product (GDP) growth to average around 3 percent in 2014 - the best performance in the G7 - before easing slightly to 2.5 percent in 2015.

"Inflation is likely to remain below target in 2015. As a result, we expect the (Bank of England's Monetary Policy Committee) MPC to keep interest rates on hold in the short term but then to increase them gradually during the course of 2015, perhaps returning to around 4 percent by 2020," Hawksworth said.