The UK economy grew 0.1% in December, giving quarterly growth of just 0.1% in Q4, a little below the consensus and Monetary Policy Committee’s (MPC) forecast for 0.2% growth. This further raises the chances of the next rate cut coming in March, instead of April. That said, we expect growth to re-accelerate to around 0.5% q/q in Q1 as receding Autumn Budget uncertainty boosts activity.

What drove December’s UK GDP growth?

Starting with December’s figures in isolation, growth was driven by the services sector, where output increased by 0.3% m/m. That’s up from a downwardly revised 0.1% in November. Strong growth in consumer-facing services saw hospitality output jump by 1.2% and retail activity rise by 0.6%. Indeed, a recovery in consumer-facing services in December is another sign of a post-Budget bounce as uncertainty subsides.

That said, much of the strength in consumer-facing services was offset by weakness elsewhere. Healthcare output fell 0.4%, which dragged on growth, but that was primarily due to doctors’ strikes over the festive period. Output here will rebound in January now this latest planned strike action is over.

Meanwhile, construction output remains chronically weak, falling by another 0.5% to round off the sector’s worst quarter since 2021. What’s more, the Construction PMI remains well below 50, suggesting genuine weakness, which may continue to drag on growth into this year.

On a quarterly basis, the chaotic tax speculation in the lead-up to the Autumn Budget clearly prompted firms to delay capital outlays as business investment dropped by 2.7%. Admittedly, most of the fall in business investment was driven by a huge 19.1% decline in volatile transport investment, which can reflect the timing of large orders such as aircrafts. In any case, investment growth was hardly stellar elsewhere, but should bounce back in Q1 as firms press ahead with capital projects now that they know the Budget contains no major near-term tax rises.

Diving deeper, strong government spending drove growth in the second half of the year. In fact, our Real Economy Barometer, which strips out volatile industries and public services, shows that the real economy entered a technical recession at the end of last year, with output falling by 0.1% for two consecutive quarters.

Overall, weak GDP growth in Q4 − below both the consensus and MPC’s estimate − will further raise the chances that the MPC will bring its next cut forward to March rather than waiting until April.

UK economic growth to accelerate in Q1 2026

Turning our focus to this year, growth should pick up sharply in Q1 as retreating Budget-related uncertainty allows for postponed activity to take place. We expect growth to come in at around 0.5% q/q.

Beyond Q1, we think consumers should be able to support growth as sharply receding inflation and a stabilising labour market could bolster confidence. Meanwhile, previous cuts to interest rates will continue to feed through and blunt the incentive for households to keep saving at elevated levels. Indeed, we expect consumption growth of around 1.2% this year, up from 1% in 2025.

However, the biggest risk is that Sir Keir Starmer is ousted as Prime Minister. This would open the door to a lengthy and noisy leadership contest. That would dampen sentiment and lead to further speculation about another Pandora’s box of tax rises, which would offset much of the improvement in the UK’s economic fundamentals.

All told, we expect the UK economy to grow by around 1.2% in 2026. It’s a little slower than 2025’s 1.3% growth, but hardly a pace of growth to cheer about. Unfortunately, we suspect we’ll be waiting until 2027 to see a genuine pickup in growth to around 1.5%.

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