Navigating UK Consumer Confidence: Defensive Plays and Sector Risks in 2025

The UK consumer landscape in Q2 2025 is a study in contrasts: modest improvements in confidence coexist with lingering economic fragility. The GfK Consumer Confidence Index inched up to -20 in May, its highest level since late 2024, driven by cautious optimism about personal finances and major purchases. Yet, broader economic pessimism persists, with the index remaining in negative territory amid inflationary pressures and geopolitical risks. For investors, this mixed picture creates opportunities to identify sectors with short-term resilience while hedging against long-term vulnerabilities.

text2img>A bustling UK high street, with shoppers in Primark and discount retailers thriving amidst cautious economic conditions

Defensive Sectors: Where Resilience Lies

1. Apparel Retailers: Thriving on Affordability and Pent-Up Demand

Apparel is a standout defensive play. Discount-focused retailers like Primark benefit from shifting consumer priorities: cost-conscious shoppers prioritize affordable fashion over discretionary spending on durables. The Revolut spending data shows entertainment and restaurant spending surged 26% year-on-year, indicating a preference for immediate gratification over big-ticket items.

Primark's business model—high volume, low margins, and fast fashion—aligns with the "frugal luxury" trend. Even in a cooling economy, apparel remains a necessity, and its reliance on domestic production (reducing exposure to tariffs) adds stability.

2. Discount Retailers: Winning in Inflationary Environments

Discount chains like Aldi and Lidl (though not publicly traded, their performance can be tracked via Tesco's discount arm) are outperforming traditional supermarkets. Their low-cost, high-margin model thrives as households prioritize affordability.

The May 2025 job ad data revealed a 27% month-on-month surge in listings, particularly in the East Midlands—a region where discount retailers have expanded aggressively. Meanwhile, Gen Z's rising confidence, fueled by the April minimum wage hike, is driving spending in affordable retail segments.

3. Health & Beauty: Inelastic Demand in a Volatile Market

Health and beauty products are non-negotiable for most households. The Revolut data highlights a 18% year-on-year rise in health-related spending, underscoring the sector's resilience.

Companies like Boots UK or B&M (which combines discount and health products) are well-positioned. Their focus on essentials—from vitamins to skincare—ensures steady demand even as consumers cut back elsewhere.

Sectors to Avoid: Durables and Supermarkets

1. Durables: Major Purchases Remain Stalled

The Major Purchase Index (e.g., furniture, electronics) sits at -16—still negative and vulnerable to macroeconomic headwinds. Consumers remain hesitant to commit to large expenditures amid uncertainty about energy costs and geopolitical risks.

2. Supermarkets: Margin Squeeze and Consumer Fatigue

Supermarkets face a double threat: rising energy costs (gas prices are 8% higher year-on-year) and consumer fatigue from years of austerity. While footfall increased slightly in June, it remains 1% below pre-pandemic levels, and households are prioritizing spending on experiences over groceries.

Investment Strategy: Balance Resilience with Hedging

1. Overweight Defensive Plays:
2. Apparel: Invest in Primark (LSE:PRMR) or Boohoo Group (LSE:BHGO), which cater to budget-conscious shoppers.
3. Discount Retailers: Consider Tesco's discount offerings or regional chains like Nisa (indirect exposure via Co-op stock).

4. Health & Beauty: Look to Boots UK (part of Walgreens) or ETFs like iShares Global Healthcare (IXJ).

5. Underweight Vulnerable Sectors:

6. Avoid durables retailers (e.g., Next (LSE:NXT)) until the Major Purchase Index turns decisively positive.

7. Reduce exposure to supermarkets (e.g., Sainsbury's (LSE:SBRY)) unless they pivot to value-driven strategies.

8. Hedge Against Macro Risks:

9. Use inverse ETFs (e.g., ProShares Short FTSE 100) to offset potential downturns in consumer discretionary sectors.
10. Diversify into recession-resistant sectors like utilities or gold-backed ETFs to cushion portfolios.

Conclusion

UK consumer confidence in Q2 2025 is a tale of cautious optimism amid persistent headwinds. Investors should prioritize sectors with inelastic demand and cost discipline, such as apparel, discount retail, and health & beauty. Meanwhile, durables and supermarkets—exposed to inflation, tariffs, and consumer caution—should be approached with caution. By balancing defensive plays with strategic hedging, investors can navigate this fragile environment while positioning for long-term resilience.

The UK's economic recovery remains a tightrope walk—favoring agility over ambition.