The UK: The path from squeeze to spending

UK domestic equities could be nearing the point where recovering real incomes, lower mortgage costs and improving confidence begin to revive consumer spending.

• UK households were squeezed between 2022 and 2023 by energy and food inflation, higher mortgage rates and taxes, but regular pay growth reached 3.7% year on year in the three months to August 2026 versus 3.3% CPIH inflation.
• The recovery is expected to proceed through five stages: a soft labour market, improving real incomes, lower household cash-flow pressure, rebuilding confidence and finally renewed credit growth; UK mortgages fixed for two to five years should transmit lower rates relatively quickly when refinancing occurs.
• Housing transactions are the key transmission mechanism because moving home drives spending on construction materials, furniture, removals and DIY; seasonally adjusted residential transactions were about 95,000 in August 2026, down 2% from a year earlier and 1% from July.
• Historical UK cycles suggest households take 12–24 months from the start of an easing cycle to feel materially better off and 18–36 months before credit-fuelled expansion becomes visible; after the 2008–09 crisis, the Bank of England cut rates to 0.5% by March 2009, but consumer deleveraging lasted until 2013–14.
• The sectors most exposed to a recovery are housebuilding and construction, retailers, travel and leisure, banks and recruitment firms; examples include Breedon, Travis Perkins and M&S, while the FTSE 250 historically rerated before mortgage approvals and earnings improved.

Takeaway: Investors may need to position before economic data confirms the recovery, with UK domestic companies offering rerating potential if inflation declines, mortgage affordability improves and confidence returns, although renewed monetary tightening and still-subdued housing activity could delay the process.