Date: Tuesday 29 May 2012
In a research note published on Tuesday morning economists at Barclays explain to clients what has led them to push out their forecast for a recovery in private consumption, namely persistent inflation; something which has been oft commented by some Bank of England watchers of late.
Thus, Barclays now sees CPI (Consumer Price Index) inflation remaining above the 2% target until mid-2014, on the back of which it estimates that households’ real disposable incomes will decline by an average of 0.5% year-on-year during 2012-14, compared to their previous expectation that households would see incomes grow by around 0.7%. Only weak growth is expected in 2013, although a stronger recovery in 2015-16 is now expected.
As for real discretionary spending, it is now expected to be flat in the second half of 2012, following modest declines in the first half, and to show weak but positive growth during 2013. In any case, a full-blooded consumer recovery is unlikely until 2014 these analysts believe, despite the decline they expect to see in the savings rate.
What are the reasons for that persistence in inflation? They cite four main reasons: low productivity, rising import costs, aggressive company pricing and a lack of spare capacity in the economy (despite high unemployment).
Lastly, and as far as the implications of this report for specific companies are concerned, Barclays retains its equal-weight stance on shares of Tesco and Morrisons while reiterating overweight on Sainsbury and Booker. Barclays adds that, “a stronger UK consumer would be incremental good news, with Tesco and Sainsbury the most likely to benefit due to their greater non-food exposure and more extensive “premium” food ranges. The bank’s analysts also “suggest” that investors “revisit” Kingfisher (rated 1-Overweight) “after a potentially negative first quarter due to the weather and Halfords, which offers what we see as a sustainable 8% dividend yield.”
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