Margins remain under pressure

While real household spending is continuing to pick up strongly, retailers have remained under pressure to offer generous discounts. Indeed, the retail sales deflator fell into negative territory in April for the first time since July 2006. And anecdotal evidence suggests that price competition between supermarkets is continuing to intensify. Looking ahead, we still expect retailers’ margins to recover only gradually over the next couple of years. Easing credit constraints should result in competitive pressures intensifying in many markets, while firms are increasingly likely to seek to expand their market share by limiting price rises now that the recovery in consumer spending is fully underway.