Shares in some of the UK’s largest retail groups took a hit as growing fears over consumer spending in the latter half of 2025 prompted sharp market reactions. Investors reacted to warnings from Deutsche Bank analysts who highlighted that a cooling labour market, combined with slower household income growth, could significantly squeeze discretionary spending on sectors like clothing and DIY, impacting major players such as Associated British Foods (Primark’s parent company), Kingfisher (owner of B&Q and Screwfix), and Wickes.

The Deutsche Bank report stressed that increasing essential costs for households, particularly rising grocery prices, are likely to put further pressure on budgets, causing many consumers to cut back on non-essential purchases. This dynamic has seen food retailers such as Tesco and Marks & Spencer, along with discount chains like B&M, stepping into a more favourable position as shoppers prioritise essentials over discretionary goods. According to Tesco’s 2025 consumer insights, this shift towards essential and discount shopping is a direct consequence of persistent inflationary pressures reshaping consumer behaviour.

The broader economic backdrop underpinning these retail sector concerns includes recent government data showing early signs of weakness in the UK labour market. Official figures from July 2025 reveal a rise in the unemployment rate and a decline in payroll numbers, signalling emerging cracks in what had been a prolonged recovery. This labour market softening has led to increasing consumer caution, particularly a heightened aversion to voluntary job changes as people grow more risk-averse amid uncertainty over future employment security. Deutsche Bank analysed this trend through a "fear index," reflecting rising anxiety among both lower and higher income groups about job and financial stability, which is in turn dampening spending appetite.

Household income trajectories further illustrate the financial strain faced by many UK families. Research from the Centre for Economics and Business Research (Cebr), commissioned by Asda, shows a notable decline in disposable incomes for middle-income households—the first in two years—with those earning around £41,000 experiencing a 1.6% year-on-year drop. The report also highlights a much sharper squeeze on lower-income families, whose spending power has fallen by 11%, translating into a weekly shortfall of approximately £73. While disposable income for higher earners has seen some growth, persistent inflation is expected to continue eroding real purchasing power across the board for the remainder of the year.

Adding to the cloud over consumer confidence are speculations around tax policy. Deutsche Bank and other analysts have pointed out that expectations of tax increases in the upcoming budget, particularly those anticipated from Chancellor Rachel Reeves, could undermine spending further. The memory of similar measures in the 2024 budget has left consumers wary of future fiscal tightening, feeding into a more cautious outlook.

The market fallout was significant: shares in Kingfisher dropped by 3.4%, marking it as the largest faller on the FTSE 100, while Associated British Foods lost 2.8%. On the FTSE 250 index, Wickes plunged by 8.6%, reflecting amplified investor nervousness around retail stocks exposed to discretionary spending downturns. Deutsche Bank downgraded its recommendations for these stocks, moving AB Foods and Wickes to “sell” from “hold,” and Kingfisher to “hold” from a previous “buy.”

Despite these challenges, there may be a silver lining for the leisure sector, as Deutsche Bank anticipates that any modest improvement in disposable income next year could be channelled more towards leisure activities such as holidays, festivals, and sports events—a stream of spending that has already outperformed traditional retail by a notable margin in recent months.

In summary, the UK retail sector faces a testing period as households grapple with inflation, labour market uncertainty, and potential tax hikes. This environment is likely to favour retailers focused on essential goods and discount models, while those reliant on discretionary spending may continue to see subdued demand and increased market volatility.