The UK’s retail industry will flatline at best in 2018 – and many shops should brace for a “fight to survive”, a leading think tank for the sector has warned.

The KPMG/Ipsos Retail think tank, in a report published on Thursday, argues that a cocktail of geopolitical and macroeconomic obstacles, combined with an increased number of regulatory compliance issues and persistent structural change, will present significant headwinds to businesses over the coming 12 months.

Lacklustre consumer spending will particularly hurt the sector, as a result of disposable incomes being squeezed by a jump in inflation coupled with stagnant wage growth, and the think tank said that the divide between non-food items and food items will widen – with demand for the former dented by higher prices for the latter.

The past year “won’t go down in the UK retail annals as a memorable one, simply because the challenging narrative barely made a detour”, said Tim Denison, the think tank’s co-chairman.

He said that retailers in 2018 “will be working manically behind the scenes reinventing the ways in which they deliver that all-important customer experience” in order to compete with rivals.

Thursday’s report also found that the sector could see more consolidation as a result of tricky trading conditions – or mergers and acquisitions – as the “fight to survive” continues to challenge players, especially smaller ones.

Last year Sainsbury’s acquired Argos, and over the summer – further afield – e-retail behemoth Amazon swallowed upmarket grocer Wholefoods in a bid to secure a bricks-and-mortar presence.

Paul Martin, UK head of retail at KPMG, said that going forward “winning market share will remain a core focus for businesses”.

He said that mid-market clothing stores are likely to be particularly hit hard by squeezed consumer spending, along with other “larger discretionary purchase categories”.

He also pointed out that “store-based” business models should prepare for a tough year ahead, as the popularity of online shopping continues to dominate.

The UK arm of US toy retailer Toys ‘R’ Us has in recent weeks made headlines with its struggle for survival. The business’s online store has thrived, but its large warehouse-style outlets have fallen out of favour.

Other – perhaps less obvious – challenges for the retail sector in 2018 will stem from the regulatory environment, the think tank forecasts. In May 2018, the General Data Protection Regulation (GDPR) comes into effect, designed to strengthen data protection across Europe. Retailers will have to be acutely aware of the data they have on their customers and how it is used.

Mr Martin said that the cost of non-compliance with GDPR could be substantial for retailers and that their reputation could be put at risk too.

On Brexit, the think tank said that it expects to see “close correlation between the outcome of Brexit negotiations and the overall health of the industry”. A soft Brexit would likely lead to meagre growth, while a hard Brexit could even see the market contract, it predicts.

Consumer confidence, directly linked to Brexit, is also going to be a key determinant of the health of the sector.

“Continued uncertainty around Brexit and its implications is undoubtedly affecting consumer confidence, which is clearly on the wane,” said Martin Newman, chief executive of e-commerce consultancy Practicology.

Official retail figures for November showed that annual sales growth was up in volume and value terms across UK retail, but the British Retail Consortium (BRC) has also struck a downbeat tone for 2018.