Andy Burnham has opened the door to a much closer relationship with the EU and even raised the possibility of rejoining one day. That has prompted warm words in Europe, including France’s finance minister urging Britain to 'come all the way back' (although he might have more immediate problems on his desk). But rhetoric is not a negotiating mandate. Rejoining the EU, or even securing a comprehensive new economic settlement, remains highly unlikely in this Parliament. The more urgent issue for businesses is whether growing EU trade defences against China leave the UK exposed, excluded or pushed into closer alignment by default.

What would closer UK–EU relations mean in practice?

A closer relationship with the EU is popular in broad terms, particularly among Green and Liberal Democrat voters whom Burnham would like to court. It also creates a useful dividing line with Brexit supporters such as Nigel Farage. Estimates of Brexit’s economic cost vary, but the Office for Budget Responsibility continues to assume that the post-Brexit trading relationship will leave UK productivity around 4% lower in the long run than if the UK had remained in the EU. Whatever view one takes of that estimate, convincing evidence of a material economic dividend from Brexit remains hard to find.

The problem is that 'a closer relationship' means something different to almost everyone. Support is much less stable once the choices are made explicit. A customs union would reduce barriers to goods trade but constrain the UK’s independent tariff policy. Single-market membership would go further, but would require extensive rule alignment, budget contributions and free movement. Full membership would bring the greatest influence, but also the full package of obligations. Polling that assumes the UK could simply recover its old opt-outs risks testing nostalgia rather than a realistic proposition.

Three barriers to Britain rejoining the EU

Even if a durable majority could be assembled for one of those options, there are three reasons to doubt that the UK will be back in the EU any time soon.

1. A lasting political mandate

The EU would want evidence that the issue was settled in Britain. An application to rejoin would require unanimity among all member states, the consent of the European Parliament and ratification of an accession treaty. With Reform still polling strongly and the main parties divided, Brussels would be wary of investing years in a settlement that a future government might try to reverse. A clear electoral mandate and, in practice, probably a referendum, would be needed before the EU treated an application as durable.

2. A complex negotiation, not a return to old terms

Any major change would consume political time and require difficult trade-offs. The UK would need to decide what it was prepared to accept on budget contributions, free movement, regulatory oversight and the role of EU law. Re-entry would proceed under the normal Article 49 accession process, not by simply restoring the UK’s old membership card. The former budget rebate and opt-outs could not be assumed. Negotiations might be quicker for a recent former member than for a new applicant, but they would still be more than a weekend’s work.

3. Closer ties come with trade-offs

Closer integration would require the UK to revisit rules and trade arrangements developed since Brexit. A customs union would mean applying a common external tariff and would limit the scope for an independent goods trade policy. Broader single-market alignment would reduce friction with Europe but increase rule-taking in areas where the UK would have little formal influence. The economic trade-off might still be worthwhile, the government’s own estimates suggest that individual trade deals such as the agreement with India add only a fraction of a percentage point to GDP over the long term, but presenting closer integration as cost-free would repeat one of the central mistakes of the Brexit debate.

What does closer EU integration mean for UK businesses?

None of this rules out a closer relationship. Sector-by-sector agreements on food and agriculture, electricity, carbon markets, youth mobility, research and defence could cut costs and improve resilience. The planned sanitary and phytosanitary agreement, for example, should remove much of the paperwork and many routine checks on agri-food trade when it takes effect, currently targeted for mid-2027. These measures matter to the businesses affected, but on their own they are unlikely to transform the performance of the whole economy.

The more immediate risk is that the UK gets squeezed between the EU’s increasingly defensive trade policy and its own desire to preserve cheaper imports and an independent relationship with China. The EU already applies additional duties of up to 35.3 percentage points on Chinese battery-electric vehicles and is developing 'Made in Europe' preferences for industrial support and procurement. British manufacturers fear exclusion from those schemes, while some EU governments worry that the UK could become a back door for Chinese goods or investment. Brussels cannot simply impose its Chinese tariffs on genuinely UK-origin goods: under the Trade and Cooperation Agreement, qualifying British exports remain tariff-free. But firms can still be caught by stricter rules of origin, local-content tests, quotas, safeguards or procurement rules, particularly where supply chains rely heavily on Chinese components.

That leaves the government with an awkward choice. Matching EU tariffs on Chinese EVs could protect access to European industrial schemes and established supply chains, but it would raise prices for UK consumers, risk retaliation from Beijing and make Chinese investment less attractive. Refusing to align preserves policy freedom and access to cheaper imports, but may leave British firms outside an emerging European protectionist wall. The sensible near-term objective is not to pretend that re-entry is imminent, but to negotiate targeted exemptions, improve rules of origin and customs cooperation, and give businesses a clear view of where the UK intends to align and where it is prepared to diverge.

It may be time to stop talking about resilience and start talking about genuine strength

For what feels like the hundredth time this year, the UK economy surprised on the upside in August, expanding by 0.1% month on month.

What’s more, revisions to previous months data combined with solid growth in August now means we expect GDP growth of 0.6% in Q3, but growth could feasibly be as strong as 0.7-0.8% in Q3 if the economy manages to eke out a little more growth in September. That means we now expect growth of around 1.5% for 2026 even if the economy stagnates in Q4.

Growth broadens beyond IT and professional services

We have previously covered the strength of IT and professional services activity. Month-on-month growth in these sectors is averaging 0.4 and 1.0ppts, more in 2026 than in 2024-2025 respectively. This looks to be at least partially driven by the AI buildout. However, a more under-appreciated trend has been the broad, albeit smaller, pickup across the whole of the economy.

Around 66% of the economy is now growing at least as quickly as it did over the previous two years. At first glance, that may not sound especially impressive. However, many of the industries in which growth has recently slowed are dominated by the public sector. Excluding those sectors, 82% of the market economy is growing at least as fast as in the past few years, and a little over half are experiencing outright faster growth than they did in 2024 and 2025.

So, faster growth is clearly being driven by surging IT and professional services activity but a swathe of other industries are also contributing to stronger growth. Indeed, retail sales have risen by a solid 2.4% over the last year and manufacturing production is up 3%.

Can the UK sustain its stronger growth?

All told, while a big part of the story is a rush of activity in a few specific sectors, there is also a positive story to tell for much of the broader UK economy this year. Of course, the risks are skewed towards slower growth later this year as inflation continues to rise, dampening real income growth but for now the UK economy is experiencing the strongest growth in years.

Labour market steady in August, allowing MPC to shift focus to inflation

The labour market is likely to have remained resilient to the energy shock through August. Solid growth has helped to keep the unemployment rate stable despite the big jump in energy costs and uncertainty. For the Bank of England, a stabilising labour market, albeit at a weak level, increases the likelihood of a rate hike before the end of the year.

On the details, we expect the unemployment rate to have held at 4.9% in August. That said, we still expect the unemployment rate to rise back above 5% in the coming months as inflation accelerates towards a peak of 4.5%, prompting firms to slow hiring as margins are squeezed.

Pay growth picks up, but inflation squeezes incomes

Private sector regular pay excluding bonuses, the measure most relevant to the MPC as it’s more reflective of underlying inflationary pressures, should nudge up from 2.9% to 3.0%. That would be the first acceleration in private sector regular pay since 2024 and will likely signal the beginning of a small acceleration in pay growth to around 3.25-3.5%. In any case, that won’t be enough to stop real private sector regular pay growth from turning negative, which will only pile on the pressure for the government to act on the cost of living in the budget.

Inflation shifts the balance towards rate hikes

For the MPC, the weak labour market has been one of the key reasons for staying on hold despite the energy shock, but natural gas prices are now the highest since December 2022, which will drive inflation to around 4.5% in the new year. What’s more, growth has consistently beat expectations so far this year, helping to keep the labour market steady. As a result, we think the Bank will hike rates before the end of the year and probably once more next year.

We expect the labour market to have held steady through the summer even as energy prices continue to rise and persistent uncertainty keeps hiring relatively subdued. Further ahead, we still think it’s inevitable that growth will slow in Q4, resulting in the unemployment rate rising back above 5.0%.

Inflation to jump again in September, increasing pressure on MPC

Inflation is likely to have risen from 3.1% to 3.4% in September and is now on course to peak at around 4.5% in the new year. That will intensify the squeeze on households, with real pay growth likely to turn negative in the coming months. For private-sector workers, it likely already has. At the same time, businesses are facing higher input costs which are squeezing margins. This will only increase the pressure on Chancellor Healey to provide more cost-of-living support for households and targeted help for businesses at the Budget.

Fuel prices drive September’s inflation rise

Motor fuels will once again be the main driver of the rise in inflation. We expect motor-fuel inflation to rise from 23% to around 30%, accounting for more than half of the increase in the headline rate. Elsewhere, we expect airfare inflation to rise from -8.0% to -2.2% as the ONS sample period shifts to include more long-haul flights booked after the conflict in Iran began. Because long-haul flights are more fuel intensive, the associated rise in costs should push airfares inflation higher.

That would leave inflation 0.4 percentage points above the MPC’s July forecast. With growth showing little sign of a sharp slowdown, we increasingly expect the MPC to shift its focus towards inflation and raise Bank Rate before the end of the year.

Further price pressures point to higher interest rates

Further ahead, rebounding energy prices will keep adding to inflation in the coming months as Ofgem’s utility price cap hike rose in October and will likely jump by around 15-20% in January. What’s more, food and industrial goods inflation will begin to rebound at the end of the year as higher energy prices work their way through supply chains and El Niño-related weather effects damage crop yields which will further add to the former.

Ultimately, inflation is set to rise in September and continue climbing for the rest of the year, before peaking around 4.5% in the new year. Combined with the recent resilience of the UK economy, that is likely to force the MPC to raise Bank Rate at its next meeting. Even so, any hiking cycle should be short-lived compared to in 2022 given the tighter starting point for monetary policy and relatively weak labour market, which means we expect just one follow-up move in 2027.

Retail sales likely rose again in September, but risks are building for retailer’s golden quarter

Retail sales probably edged up again in September, underlining the resilience of consumers despite the sharp rise in energy prices since the start of the Iran war. For consumer-facing businesses, this suggests demand held up into the autumn despite elevated uncertainty and mounting pressure on household finances. However, the tougher test is still yet to come. Inflation is likely to rise through the rest of the year and peak at around 4.5%, pushing real wage growth into negative territory.

Stronger confidence supports September spending

Our best estimate is that retail sales volumes rose by around 0.2% in September. Consumer confidence reached a two-year high, while the UK recorded its fourth-warmest September on record, both of which should have supported spending. What’s more, confidence amongst younger consumers, who have been a better guide to spending recently, surged to a decade high. Indeed, the BRC measure showed annual retail sales growth accelerating from 0.7% in August to 1.3% in September, which reassures us that retail sales remained firm.

Admittedly, retail sales are volatile and rose by 0.5% in August so there’s a chance of sales volumes easing back in September. Nonetheless, consumer credit flows have been strong, confidence is at a two-year high and more timely measures of consumer spending have been robust. So, we see little in the data to suggest consumers cut back on spending in September.

Rising inflation threatens retailers’ golden quarter

Ultimately, retails sales should have maintained much of its positive momentum through September, but we think that’s unlikely to last through Q4 as higher inflation means real wage growth turns negative which is likely to drag on consumer spending.

Related insights