Talk of recession has put an end to economic stability

The high level of consumer debt, turmoil in the financial markets, rising cost of food commodities and fuel, the credit crunch and a potential economic slowdown - it doesn't look good for 2008. Added to this, poor harvests in Canada, Australia and Eastern Europe have meant that manufacturers are currently having to pay as much as 6% more for their raw ingredients than a year ago. Much of this cost is being drawn back from retailers, who in turn are being forced to pass it on to shoppers.
The fact that food price rises are coinciding with some of the highest ever prices for petrol and diesel isn't making life any easier, and analysts expect to see further hikes throughout 2008. In fact, motoring experts have grimly predicted that the price of unleaded petrol could soon reach as much as £1.50 a litre.
Energy prices are also likely to continue rising this year, resulting in higher bills for retailers and consumers.
The worry is that after the excesses of Christmas and the New Year, shoppers will keep a close count of their pennies for the start of the year, meaning that indulgent items such as confectionery, beverages and even food to go are likely to be less in demand.
Many experts, including the Organisation for Economic
Co-operation Development and International Monetary Fund, expect the growth rate of the UK economy to slow from 3.1% to 2% this year.
"Retailers are facing a very challenging year," said BRC director general Kevin Hawkins. "Not only is a severe slowdown in consumer spending likely, but retailers' share of that spend is set to fall significantly, ratcheting price competition up still further. If interest rates do not fall further and disposable incomes continue to weaken, confidence levels and customers' willingness to spend will continue to decline. That's bad news for all consumer-facing businesses."
Analysts expect that further rate cuts will be implemented this year, and many are predicting that interest rates may fall below 5%.

James Walton, chief economist, IGD

"Storm clouds have gathered in the past six months, but the economy remains fundamentally strong in many respects as we enter 2008. Consumers are likely to be watching their pennies in the new year, especially as the credit crunch bites into spending, energy costs soar and retailers struggle to keep prices down on items such as cereals, dairy and fresh produce. Widespread speculation about an economic downturn means we run the risk of a self-fulfilling prophesy.
"The modern convenience sector has never faced a period of sustained, strong grocery price inflation, and shoppers under the age of 50 will not have seen food prices rising in this way before. While there will always be a strong market for convenience necessities, it may be that luxury items will be less in demand as shoppers tighten their belts. However, there is a strong counter-argument that convenience demand is relatively inelastic - that is, higher prices do not discourage spending. This is likely to be the case if, and only if, other aspects of the offer, such as service, immediacy and environment are met."

Tim Lake, Redlands Stores, Fareham, Hampshire

"This year will be one of the toughest ever for independent retailers. The price of bread, milk and even chocolate soared in 2007 and will continue to increase this year. On top of this, retailers will also have to contend with rises in the cost of power, the minimum wage and holiday pay, meaning that it will become harder and harder to maintain any kind of margin.
"Gone are the days when you could just buy in a product, put in on the shelf, sell it at the rrp and make a decent profit. You have to be so much cleverer about it now. However, it's not all doom and gloom, there is still plenty of scope for good independent retailers - they will just have to work much harder at it."