Tesco share price outlook as UK recession risks rise

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Updated on Aug 14, 2024

Reading time 3 minutes

Tesco stock price has been in a strong bullish trend in the past few months.
The most recent data showed that the country’s retail sales dropped in August.
The manufacturing and services PMI moved to a contraction zone.

Tesco (LON: TSCO) share price has staged a strong comeback in the past few weeks even as risks to the British economy remains. The stock was trading at 270p on Friday, a few points below the year-to-date high of 277.7p. It has soared by more than 415 from the lowest level in 2022.

UK risks remain

There are significant risks to the British economy. Data published on Wednesday revealed that the country’s consumer and producer inflation remained at an elevated level. The headline and core inflation – which excludes food and energy – stood at over 6%.

And on Friday, data by the Office of National Statistics (ONS) revealed that the UK’s retail sales dropped in August. The headline and core retail sales dropped by 1.4%, worse than the expected drop of 1.2% and 1.3%.

These numbers are important for Tesco since it is the biggest retailer in the UK. As such, a drop of retail sales means that the volume of Tesco sales could be affected as well. In most periods, however, Tesco tends to do well because of the company’s scale in the UK.

Another report by S&P Global showed that the manufacturing and services sectors continued contracting. The services PMI dropped to 46.8 while the manufacturing PMI fell to 44.2. A PMI of 50 and below is usually a signal that a sector is contracting.

Therefore, there are signs that the UK economy is not only in a recession but in a stagflation period. Stagflation is a period when high inflation is accompanied by slow economic growth.

I believe that Tesco can do a few things to boost its stock. For one, the company could spin off its banking group into a standalone business and also reduce its total costs.

The daily chart shows that the TSCO stock price formed a double-bottom pattern at 244.4p. In price action analysis, double-bottom is one of the most bullish signs. The shares have moved above the neckline at 264.3p. It has also moved above the 50-day and 100-day moving averages.

The Relative Strength Index (RSI) has continued rising and is nearing its overbought level of 70. Therefore, the outlook for the shares will likely continue rising as investors target the key resistance at 280p. The stop-loss of this trade will be at 264p.