The City

It had also better pay attention to what shoppers are saying - that they have lost confidence in the economy and therefore in their ability to maintain their spending patterns.

The evidence that households are drawing in their horns is overwhelming. High street sales were 3% lower in April than in the same month last year. Meanwhile, the volume of goods sold in stores in April fell at the steepest rate since 1992. What is more, the slowdown is across the board, encompassing leisure, consumer staples and household goods.

At the same time debt charities and credit agencies are reporting that the number of people unable to pay their bills has soared to a level last seen during the mid 1990s recession. More than 10,000 Britons went bankrupt in the first three months of this year, which is the highest figure on record, despite record levels of employment. For the year to the end of March, the number of bankruptcies rose by 30%.

Following five interest rate rises since 2003 (admittedly to the comparatively low 4.75%), the number of properties changing hands in the first three months of the year halved compared with 2004, reflecting higher mortgage rates and the expectation of a housing price downturn.

People are counting the pennies, but the slowdown in consumer spending has serious implications for all retailers and their suppliers, especially as consumer spending has driven the economy forward over the past four or five years. When a retailer's sales rise it has greater negotiating power with its suppliers. This allows it to improve gross margins and cut prices, thereby increasing sales volumes. The company then opens new outlets to cater for increased demand - think Tesco or the pubcos of the late 1990s.

But the opposite is also true. Slowing sales reduce buying power and margins, and squeezed cash flow hits the case for new openings. For instance, JD Wetherspoon has put the brakes on expansion in the past few months.

And what is not widely appreciated is that the greatest debt problems are faced by the young. They have benefited from cheap money and easy credit, but when the crunch comes they have no assets to fall back on: the average student ends a course more than 12,000 in the red. Yet the young are a prime target group for leisure retailers.

Gordon Brown steadfastly claims that the Government's finances are in good order and that there is no black hole. But the public is wary. Any further tax increases would only add to the mood of caution and pare discretionary spending. Consumer slowdowns are reckoned to take 18 months to reverse. We are in for testing times.

• Harpers Says...