From Morgan Stanley:
The consumer is not relaxed and businesses are struggling to relate. Recent reports from our sector teams add support to our crunch time thesis around the domestic cycle cash flow squeeze. Filling the cracks with materials is something to consider given meaningful PT upside (MS and Consensus). Consumption Crunch Playing Out: Discretionary spending is being crunched by falling incomes, cost of living inflation,and broadening credit rationing that is withdrawing consumer liquidity. Domestic growth risks are moving beyond housing and the impacts of macro-prudential tools, with signs of credit rationing in auto and consumer finance,given greater regulatory oversight and application of responsible lending practices. The resulting slowdown in broader activity is the causal link to the slowing revenue outlook,and is challenging Industrials earnings expectations.
Evidence in Consumer-Linked: There is less of a savings buffer to absorb this real income hit,given the savings rate has already fallen from 10% in 4Q11 to below 5% in 1Q17. In addition, the housing cycle tends to be a key support for the consumer through credit and wealth effects, which looks to have peaked, while the MacroPru cycle is also withdrawing disposable cash flows – whether through mortgage repricing or the shift from interest-only to amortising mortgages. All up, we think it will be difficult for consumers to continue to live at or beyond their means,and we remain cautious on the consumer outlook.
