The UK retail sector is heading into a period of uncertainty as household incomes slow and the government prepares to deliver its budget on Nov. 26. RBC Capital Markets said consumer sentiment is likely to fluctuate, with speculation on tax hikes weighing on spending.
“We expect sentiment on the UK retailing sector to ebb and flow, between a drumbeat of doom in the run-up to the Nov 26 budget, and likely resilient retail spend given yoy increases in household cashflow,” the brokerage said in a note dated Monday.
Disposable income growth is moderating as wage inflation eases and food prices edge higher. RBC projects primary income, which measures earnings after tax, to rise 5% in 2025 and 3.3% in 2026.
Household cashflow before savings is forecast to increase 4.7% this year and 2.5% next year.
The analysis noted that “UK disposable income should remain positive yoy and the savings rate has potential to fall further, as lower interest rates create less of an incentive for consumers to save.”
Housing costs remain the largest financial strain, accounting for more than 40% of nondiscretionary spending.
RBC estimates about half of mortgage holders will face higher payments over the next three years as fixed-rate deals expire. Property-related expenses continue to grow faster than inflation, though the pace of increases is expected to slow as mortgage rates soften.
The Bank of England has already delivered a 25 basis point cut in August and is expected to reduce rates again in November.
Food inflation is set to peak at around 5% in the second half, driven by higher costs in categories such as meat, chocolate and coffee. Price pressures in fresh food reflect labor costs at suppliers.
Inflation is expected to ease in ambient food lines. At the same time, utility bills are climbing, with the Ofgem cap raising electricity and gas prices 6% in April, while water bills rose an average of 26% this year.
The UK savings rate fell from 12% at the end of 2024 to 10.9% in the first quarter of 2025, according to the Office for National Statistics. Analysts expect further declines as falling interest rates make saving less attractive.
“Consumers may become battle hardened to negative media coverage,” the analysts added, noting that shoppers are likely to remain highly price sensitive and focus spending around promotions.
Retailers with exposure to discretionary, big-ticket items are seen as most at risk. RBC flagged housing-related chains and sellers of white goods and electronics as particularly vulnerable, while food and apparel chains are less likely to be affected.
On the company front, RBC maintained an “outperform” rating on Next, citing the strength of its online arm and international expansion.
Earnings forecasts were lifted 3% to 6% due to share buybacks, with a price target of 13,200p.
In contrast, Pets at Home saw its forecasts cut by 14% to 16% following weaker store sales and the exit of its chief executive, with the target price lowered to 190p from 215p.
Source :
https://www.investing.com/news/economy-news/uk-retail-outlook-2025-faces-budget-jitters-rising-costs-and-slowing-cashflow-4247862
