West Midlands 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. 

Local consumers are bearish across a range of indicators with 25% feeling negative about their personal debt and 25% about job security. Sixty per cent of local respondents were pessimistic about disposable income, 7% more than the national average. Fifty-four per cent of West Midlands consumers have noticed an increase in their weekly food bills, even higher than the UK average of 44%.

Jane Whitlock, Consumer Business Partner at Deloitte Birmingham, 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. Forty one per cent of West Midlands consumers are spending less on entertainment (cinema, theatre, concerts), whilst 35% are spending less on clothing and footwear, 32% on furniture and homeware, and 24% 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, 54% spending more on food and 40% spending more on transport costs.

However, Deloitte's modelling work using Google search trends indicates that reductions in total UK 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.

Whitlock concludes: "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.

"Whilst some groups are demonstrating greater resilience than others, our research shows that the squeeze is being felt by the vast majority of West Midlands consumers which presents an enormous challenge to all local consumer businesses."