Whitewashed shop windows, shutters long pulled down, a Woolies strip-lit and bare, grafitti everywhere — the toll of the recession is obvious in town centres and suburban shopping arcades up and down the country. But the wipeout that many expected hasn’t happened.

Instead of a recessionary explosion laying waste to retailers, the effect of the downturn has been more insidious, spreading silently throughout the high street. It is a debilitating economic ailment diagnosed in a wide-ranging study carried out for The Times by OC&C, the strategy consultants.

The State of Retail 2009 report on Britain’s biggest 230 store groups reveals a huge erosion of profitability across the sector, margins that, as many a shopkeeper will tell you, are already thin compared with other industries. Profit margins fell by 0.2 percentage points across the index of the country’s 230 biggest retailers, a swing substantial enough to mean that a 5.1 per cent — or £10 billion — increase in revenue had virtually no effect on the bottom line.

And even this performance is flattered by the supermarkets, which have managed to improve their profitability despite a period of unprecedented food inflation. Exclude the grocers, and retailers’ profit margins have declined from 6 per cent to an expected 4.1 per cent for 2009. This means that profit — on the level of earnings before interest and tax — will decline to £4 billion, down by 27 per cent from the state of play in 2007, according to projections including the latest trading statements.

Anthony Gent, manager in consumer practice at OC&C, said: “There has been pressure at the top, with more promotions and mark-downs, and pressure from below, with increased costs. For the past 18 to 24 months, retailers have ramped up promotions in response to the slowdown, trying to tempt nervous consumers to spend.”

Yet, Mr Gent argues, the proliferation of special offers and discounts is of less concern than the inflationary pressures building up at the other end of the retailers’ businesses. “In a number of segments, particularly clothing, Far East sourcing has gone as far as it can,” he said. “Going further and further East, along with a strong pound, has supported retail historically by bringing prices down.” But as Asia has developed, its producers have begun to command higher prices. Add to this the slump in sterling and OC&C believes that retailers should get used to living with rising costs.

Even among non-food retail bosses, there is a growing consensus that shoppers will have to accept that some of that cost inflation will filter through to the price tag.

Terry Duddy, chief executive of Home Retail, which owns Argos and Homebase, argued recently that the runaway food inflation of last year meant that consumers would be more accustomed to price rises caused by sterling’s fall. The company has said that it expects an increase of up to 10 per cent in its costs in the Far East.

Simon Wolfson, chief executive of Next, has said that pound-driven price rises would be comparatively small in relation to most clothing purchases — a pound or two on a £20 pair of trousers, say, or a similarly priced skirt, may not break the bank — but bosses in less fertile parts of the retail landscape, where the topsoil of profit is shallower than in fashion, may not agree.

Retailers, including Home Retail and Next, have been able to dampen the effect of the weak pound because of excess capacity in China, lower freight costs and, in Next’s case, by moving production. But analysts argue that these factors may disappear, leaving British consumers with higher prices or retailers with smaller margins, if the pound stays weak for a prolonged period — as many economists fear.

Almost every category of retailer has suffered declining markets in the past year, with the exception of the supermarkets, music, video and gaming and books. Moreover, and similar to last year’s State of Retail report, OC&C has found a troublingly neat correlation between low profit margins and online penetration. The electrical goods market offers the best example, not only because of online purchases but also because internet research arms customers with up-to-the-minute price comparisons, making it difficult for giants such as Currys and Comet, owned by DSG International and Kesa respectively, to command a premium.

Although online fashion retail has been booming, only 6 per cent of total sales are conducted online. Profit margins accordingly have remained at slightly more than 8 per cent. OC&C believes that one of the key features protecting fashion from margin erosion is that it is ill-suited to internet shopping.

So the growth of the internet sales, the weak pound and the development of Far Eastern economies all point to a more austere existence for British retail — and quite possibly for customers, too. The patient, it seems, may never quite recover its former rude health.

Times Recommends

• EMI gambles on £400m pact to beat the bank
• Chancellor must find extra £10bn in savings
• Tesco’s secret chain charges customers more