By Claire West

The retail outlook for 2011 is bleak, with households feeling the squeeze and margins under severe pressure.

Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, comments on last week's retail sales figures:

These figures could have been a lot worse - the impact of the snow seems to have been mostly offset by VAT effect

Factoring in these figures, we expect the ONS to announce that GDP grew by 0.4% in Q4 next week

The retail outlook for 2011 is bleak, with households feeling the squeeze and margins under severe pressure

“On one hand these figures could have been a lot worse - when we had similar snow-related disruption last January the month-on-month decline in retail sales was much greater. But that has to be balanced by the fact that this was the final month before the VAT rise and we would usually expect that to have boosted sales.

“The sector breakdown gives a good idea of the impact of these issues. The impact of the snow is very apparent in the sharp declines in sales in the food and automotive fuel sectors. But the greater resilience of 'non-specialised stores' and, in particular, non-store retailers, suggests some powerful VAT effects. Indeed the very strong performance of internet retailers contradicts some of the earlier business surveys, in suggesting that, when faced with the bad weather and travel problems, many consumers turned to the internet to do their Christmas and sales shopping.

“It’s going to be difficult to gauge underlying trends until we have the January figures too, as snow and VAT could well have an opposite effect on the January data. In years gone by the MPC has regularly said that it is difficult to gain a true gauge of consumer strength around the Christmas and New Year period and that is even more the case this time given these temporary effects.

“These figures give us a better idea of what to expect when the Q4 GDP figures are published for the first time next week. It is clear that the snow has had some impact, particularly in the services sector, so we expect a softer reading than was reported for either Q2 or Q3. We're expecting to see quarterly growth of 0.4%.

“2011 is going to be a very challenging year for retailers. Surging inflation is intensifying the squeeze on households' spending power, and falling real wages is likely to be a feature throughout this year. The pressures on households will become even greater in April when they will also have to deal with an increase in personal taxation when employees' National Insurance Contributions increase. When you also factor in the fact that despite increasing prices, the scale of input cost inflation is still eating into margins, its clear that life is going to be very tough on the high street."