As the cost-of-living crisis takes hold, the UK faces the harsh reality of a cut back economy, with consumers planning to significantly reduce their non-essential spending to offset sharp rises in everyday living costs.

Faced with rapid inflation, rising interest rates, and higher taxes, household finances are being tested from all angles, affecting consumers’ ability to fulfil their wants and needs. Consumer confidence has plummeted to record lows, as squeezed incomes, political instability and genuine fears of an oncoming recession signal the arrival of a ‘Cut Back Economy’.

The research revealed that of those planning to cut back in spending, more than a quarter (28%) intend to do so across all areas of their spending. Worryingly for retailers and the wider economy, 41% of consumers expect the current squeeze on living standards to impact their spending habits until at least the end of 2023.

The typical UK household is set to cut back £887 of their discretionary spending through to April 2023, based on economic modelling within the report. Across all households, the cost of living crisis is forecast to wipe out £24.9 billion of discretionary spending across the economy during this financial year.

Seeing their budgets squeezed, many consumers will adopt recessionary behaviours by trading down, shopping less or sacrificing purchases altogether. One in two shoppers say they will switch to cheaper brands or retailers to combat cost pressures, while a similar proportion (43%) plan to make fewer non-essential shopping trips.

Loyalty will also emerge as a key battleground for retailers and brands. More than a third (36%) of consumers are looking to make savings by making better use of loyalty schemes.

The report found that 36% of UK households are ‘Financially Distressed’ and plan to cut back across most (if not all) of their non-essential spending – a decision taken out of necessity, as low incomes and/or high debt levels leave little room for these households to manage rising living costs.

One in four households are ‘Squeezed Spenders’, who recognise the need to cut back across some of their spending but generally prefer to borrow, dip into savings or use buy now pay later schemes than let money worries get in the way of their desires.

‘Comfortable Cautious’ consumers make up another quarter of households. These households are finically secure but still worry about the cost-of-living crisis, choosing to cut back across some of their spending out of precaution. Only 14% of households are ‘Financially Immune’ with no plans to cut back their spending.

Groceries, fashion, and restaurants are the top three areas that UK consumers will cut back on, according to the research.

For most consumers, cutting back on the weekly food shop will involve switching to cheaper private-label brands or discounters (52%), using loyalty schemes and vouchers more often (40%) and buying more in bulk (32%).

Financially distressed households are having to resort to more extreme measures. In response to rising prices, a third of low-income consumers are cutting back on their food shop by eating less.

Among non-essentials, clothing and footwear is at the top of consumers’ cut back priorities. Almost half (47%) of UK households plan to reduce their spending on fashion, with the average household expected to cut back nearly 11% - or £137 - of their annual clothing and footwear spending.

Three in five (58%) Gen Z (18-24 years old) shoppers plan to cut back on fashion purchases – more than any other age group. Younger generations will also lead the cut back in restaurants and hospitality, with Gen Z twice as likely to cut back on ‘going out’ than retired Boomers.

The typical UK household is expected to cut back 9% of their spending on restaurants and hospitality, putting £8.5 billion of trade at risk across the industry.

Nicola Sartori, head of M&A retail and consumer at Grant Thornton UK, said: “Retail and consumer-facing businesses are facing significant challenges as surging inflation and geopolitical instability heralds the arrival of the Cut Back Economy. With the average household set to cut back £887 of their discretionary spending through to April 2023, UK retail and consumer industries are at risk of losing out on £24.9 billion of spending this financial year.

“Businesses will need to adapt their propositions to differentiate themselves from the competition and maintain relevancy as a more cost-conscious consumer emerges. Our research identifies key areas that retailers and consumer-facing businesses can focus on (and invest in) to help mitigate the impact of the Cut Back Economy.”