If the UK economy were a hospital patient, it’s been on life support recently. But, the last week has felt like a full-body MOT. We’ve checked the pulse (PMIs), taken the temperature (inflation), tested the reflexes (retail sales) and run blood work on the labour market. The verdict? Signs of life are returning, but it’s not out of the woods yet.

The UK economy ended 2025 on a low

Let’s start with jobs, because right now, that’s the weakest part of the economy and the bit the Monetary Policy Committee (MPC) is looking at most closely.

The latest labour market data shows the unemployment rate rose to 5.2% in December. That’s the highest since 2016, excluding the pandemic. The pain here is highly concentrated among the young. The unemployment rate for 18−24-year-olds has jumped to 14%, and low-paid sectors, such as retail and hospitality, have lost around 170,000 jobs since April 2024. This suggests that much of the weakness is down to the huge increases in the cost of employing someone young and on low wages. What’s more, private sector pay growth slowed to 3.4% at the end of last year. Given inflation in December was also 3.4%, households working in the private sector saw no real pay increase.

That’s a poor prognosis, but the data for the start of this year takes a much more positive turn.

Vital signs more positive for 2026?

Inflation in January dropped to 3% as food price inflation slowed and fuel prices turned negative. These are especially important because they influence how consumers think about inflation, which in turn impacts wage and price-setting behaviour and feeds into actual inflation.

The really key point, though, is that the next step down for inflation is baked in. April should see inflation fall close to 2%, helped by base effects and policy decisions like freezing rail fares and cutting electricity bills. The obvious risk here is that there’s a bigger rise in oil prices. They’re already up 20% this year off the back of rising tension in the Middle East.

Chancellor Rachel Reeves will also be cheering up a little. There’s always a budget surplus in January because it’s when a lot of self-assessment taxes come in. This year there was a record surplus, which sets government borrowing up to come in below the latest OBR estimate for this fiscal year. Admittedly, some of this might be due to people cashing in assets ahead of the Autumn Budget and so might not be sustained. However, it will give the Chancellor something to shout about in the Spring Statement on 3 March.

Then, just when you might’ve been preparing for a gloomy start to 2026, retail sales delivered a jolt of optimism. Volumes, excluding fuel, surged by 2% month-on-month in January. Even allowing for seasonal adjustment quirks, that’s a punchy rebound. Non-seasonally adjusted sales were 5.1% higher than a year earlier. Consumers, it seems, are opening their wallets again as Autumn Budget uncertainty fades.

This is important because the UK economy ultimately runs on household spending. If consumers decide the worst is over now that inflation is falling, interest rates are coming down and housing is stabilising, then this means growth can surprise on the upside. That said, retail sales are volatile. It wouldn’t be surprising to see sales fall back in February, but the trend is clearly up.

Finally, the PMI surveys for February showed that growth continued to recover as Budget uncertainty fades. If you don't follow the PMIs, then you're missing out, but they are business surveys that give us a decent real-time read on how most of the private sector is faring. There’s been a marked jump in the composite PMI since November’s Budget. It’s averaged 53.0 in the last three months compared to 51.1 in the three months leading up to it.

The output measure also hit the highest level since April 2024 in February and new orders were the strongest since September 2024. However, that pickup in output and new orders isn't translating to higher employment yet. The survey suggests employment is still falling, just at a slightly slower pace. It also suggests underlying inflation is sticky. The output prices measure increased for the third time in a row and is now the highest since April 2024, although input prices did soften a little.

A recovery ahead for the UK economy?

That’s a lot of moving parts for one week. But, three key things to takeaway.

First, the economy is clearly shaking off the Budget blues and has picked up at the start of this year. We expect growth of 0.4% or even 0.5% in Q1. Just as importantly, this will be driven by improvements in the private sector rather than higher government spending.

Second, the labour market remains weak. The pickup in sales and activity doesn’t seem to be filtering through to stronger hiring yet. But, there are some signs that the job market is stabilising. The unemployment rate will probably go a little higher as job growth hasn’t kept up with population growth, but the stronger economy should mean job growth picks up later in the year.

Third, the outlook for interest rates hasn’t changed much. A rate cut in March is still a sure bet as the jobs data remains weak. But, signs of an economic recovery and sticky inflation will keep the MPC cautious. Our base case is one more cut after March, taking rates to 3.25% by the end of the year.

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