An improving outlook for household incomes in 2023 is good news for UK retailers, according to analysts at RBC Capital, who specifically mentioned Next PLC (LSE:NXT) and WH Smith PLC (LSE:SMWH) as beneficiaries.
A strong employment backdrop and falling energy and fuel costs are the driving factors behind household incomes improving over the next 12 months, analysts at the UK arm of the Canadian bank said.
They noted that employment, unlike during previous financial crises, has remained strong, although it is expected to weaken somewhat. Likewise, wage inflation remains strong, highlighted by Sainsbury's recent wage hike, and although this may seem a headwind, much of this is expected to be recycled back into the sector.
The analysts pointed out that UK employment and wage inflation have remained strong in comparison to previous financial crises.
Food and utility costs should moderate, with the average household energy bills forecast to fall below the £2,500 cap by summer this year, they said, though mortgage and rental payments, which make up the largest non-discretionary spending among households, continue on a rising trend.
However, the RBC analysts noted that household costs are no greater than when they last reported on UK household cashflow in early December last year.
All-in-all, the analysts predict current household cash flow to be down 1.5% year-on-year, although that is an improvement on their forecast of three months ago, and it is expected to improve throughout 2023.
Post-savings, the RBC analysts expect a small rise in cash flow as consumers follow the precedent set in the US and continue to dip into their savings.