The UK retail sector is entering a period of uncertainty as household incomes slow and the government prepares its budget announcement on November 26. According to RBC Capital Markets, consumer sentiment is likely to fluctuate, with ongoing speculation about possible tax hikes weighing on spending.
RBC noted that confidence in the retail industry may swing between “a drumbeat of doom” ahead of the budget and steady spending, supported by year-on-year growth in household cashflow.
Wage inflation is easing while food prices continue to rise, slowing disposable income growth. RBC forecasts that primary income, which reflects post-tax earnings, will grow 5% in 2025 and 3.3% in 2026. Household cashflow before savings is expected to rise 4.7% in 2025 and 2.5% in 2026.
Despite higher costs, UK disposable income should remain positive year-on-year. Falling interest rates are also likely to reduce the incentive for consumers to save, which could push the savings rate even lower.
Housing remains the biggest pressure point for households, accounting for over 40% of nondiscretionary spending. Around half of UK mortgage holders will face higher repayments over the next three years as fixed-rate deals expire. Property-related expenses are still outpacing inflation, though the pace of growth is expected to ease as mortgage rates soften.
The Bank of England already cut rates by 25 basis points in August and is expected to make another cut in November. Food inflation is forecast to peak at around 5% in the second half of the year, especially in categories like meat, chocolate, and coffee. Rising supplier labor costs continue to impact fresh food prices, while inflation in packaged goods is expected to ease.
At the same time, utility bills are climbing. Ofgem’s cap increased electricity and gas prices by 6% in April, while water bills jumped an average of 26% in 2025. The UK savings rate fell from 12% at the end of 2024 to 10.9% in the first quarter of 2025, with analysts expecting further declines as lower interest rates discourage saving.
Shoppers are likely to stay highly price-sensitive and concentrate their spending on promotions. Retailers exposed to discretionary big-ticket items, such as home goods, white goods, and electronics, face the most risk. Meanwhile, food and apparel retailers are expected to be more resilient.
On the company level, RBC maintained its “outperform” rating on Next, highlighting strong online growth and international expansion. Earnings forecasts were raised by 3% to 6% thanks to share buybacks, with a price target of 13,200p. In contrast, Pets at Home saw forecasts cut by 14% to 16% after weaker in-store sales and the departure of its CEO, with its price target reduced to 190p from 215p.
