With only two more England batting collapses until Christmas, we wanted to take a look at some of the key themes that have driven the UK economy this year and examine what some of the key themes for next year might be.

A lot of this year has been driven by policy changes: worrying about them, predicting them, being surprised and disappointed by them.

The Bank of England’s had a busy year, cutting interest rates three times already and probably once more on Thursday. This would mean the base rate should be a full percentage point lower at the end of 2025 than at the start. However, this hasn’t helped to bring down government bond yields. These started the year at 4.5% and are still at 4.5%, with a fair bit of volatility in between. That means the positive impact of lower interest rates on borrowing costs and the economy will be muted.

Fiscal policy also dominated the airwaves this year, especially in the last quarter. We’ve started to see the damage rampant speculation ahead of the most recent Autumn Budget has had. The UK economy unexpectedly contracted in October and services output dropped sharply. The fingerprints of pre-Budget worries are obvious. This picture will probably get even worse in November and means the economy will do well to avoid contracting in Q4.

Finally, how could we forget US tariff policy? Its bark turned out to be much worse than its bite. Indeed, one big theme for this year − at least until recently − has been resilience. Despite the imposition of tariffs, big tax rises and all the associated uncertainty, both UK and US economic growth was solid in the first nine months of the year and financial markets have soared. Much of this is due to AI, though, which comes with risks of its own.

Elsewhere, the return of inflation, which doubled from a brief dip below 2% in 2024 to peak at almost 4% earlier this year, re-ignited concerns about the cost-of-living crisis. Meanwhile, the labour market’s weakening with the unemployment rate rising from 4.4% to 5% − and possibly slightly higher as more data comes through this week − probably didn’t get as much attention as it deserved.

Overall, 2025 will probably turn out to be a year of average economic performance and remembered for one of the most chaotic Autumn Budgets in modern times.

Key UK economic themes for 2026

Looking ahead, policy ’should’ play a much smaller role next year. The Bank of England will probably only cut interest rates once more, unless the economy materially weakens. Now that the Office for Budget Responsibility (OBR) has downgraded its forecasts, we’re moving to just one fiscal event a year. In theory, the latest Budget has also stabilised the public finances, at least for the next couple of years, by doubling the headroom. So, there should be much less speculation about another round of tax rises in 2026. Assuming, of course, the government has reflected on its communication strategy.

Moving from the policy to the macro front, inflation should drop back sharply after April, helping to lessen worries about cost-of-living pressures. In its place, the labour market will quickly rise up the ranks of economic anxieties, especially given the concerning rise in youth unemployment.

Expect consumers to come more into focus next year as well. One of the biggest ’known unknowns’ is whether households will continue to save at exceptionally high levels or finally start to spend more. That’ll be the deciding factor in whether the UK economy will see stagnation or a rebound in 2026.

Internationally, AI will continue to dominate the narrative. It’ll be a while yet before we have a clear sign of its impact on the economic data or on the labour market. And for all the talk of an AI stock bubble, markets are still close to record highs. Elsewhere, we’ll be watching oil markets internationally for signs that the glut is leading to lower energy prices.

What are the economic risks to the UK in 2026?

As always, there’s enough risk on the horizon to keep us up all year. But, those that stand out fall broadly into three themes.

First, trade. Despite the recent deals reached between most major countries and the US there’s little hope that we’ve heard the end of US tariffs. There’s also a significant chance that the EU imposes more tariffs, which could have a much greater impact on the UK. In this bucket, we’d also place the broader fragmentation of the global economy that’s likely to continue.

Second, war. Hopefully, the fragile peace in the Middle East will be maintained, but conflict in Ukraine will probably continue and could intensify. The build-up of forces around Venezuela is also an obvious potential flashpoint. More conflict could turn a relatively benign outlook for global commodity prices into a big drag.

Third, fiscal. In theory, the most recent Budget should have stabilised the UK’s public finances. However, given the UK still runs a large deficit, as do governments in almost all advanced economies, this combined with relatively high interest rates means there’s a big risk of another flare-up in bond markets or countries being forced into fiscal austerity, which would dampen growth.

In short, 2026 looks less like a year of dramatic policy swings and more like a test of whether the economy can stand on its own two feet. With interest rates stabilising, fiscal policy temporarily parked and inflation fading as the dominant concern, the spotlight will shift to the fundamentals of the health of the labour market, the willingness of households to spend and the economy’s exposure to an increasingly fractured and volatile world.

The risks are real and, in some cases, uncomfortably large. But, so too is the scope for a modest upside surprise if consumers loosen their purse strings and global shocks remain contained. After a year defined by noise, speculation and policy-induced uncertainty, the hope for next year is something far rarer. That’s a period in which the data, rather than the drama, does most of the talking.

When the figures are released on Tuesday, the labour market will show a further loosening across October and November as Budget uncertainty weighed on hiring.

The headline unemployment rate will likely tick up to 5.1% in October. Admittedly, the unemployment rate is derived from the Labour Force Survey (LFS), which while improving, remains somewhat unreliable due to a low response rate.

Payrolls for November will probably suggest that Budget nervousness ramped up even further. We expect a 15k fall as firms were in wait-and-see mode before making big hiring decisions. That said, October’s big 32k drop in payrolled employees should be revised up.

Pay pressures should continue to subside in October and with a bit more momentum, with total earnings likely dropping to 4.5% from 4.8%. Further easing will be driven by a big slowdown in private sector pay, which will probably fall to 3.8% from 4.2%. This should reassure the Monetary Policy Committee (MPC) pay growth is slowing to a more sustainable level.

Looking ahead, we expect the unemployment rate to stabilise before gradually nudging lower across 2026 as firms recover from last April’s big rise in employment costs. However, pay growth could prove stickier, which will prevent the MPC from cutting rates further next year, underpinning our call for a terminal rate of 3.5%.

Wednesday’s inflation data should show November’s rate nudge down to 3.5% in November from 3.6% in October. Slower price rises in food and tobacco inflation will likely drag down the headline measure. However, services inflation will likely edge up.

Falling food price inflation in November will help to reassure the more hawkish members of the Monetary Policy Committee (MPC) ahead of Thursday’s meeting.

Tobacco inflation should also drop sharply. Tobacco duty will rise a month later than it did last year because of the 26 November Budget. That will drag down the annual measure for tobacco inflation, albeit only for a month, and cut around 5bps from the headline figure.

However, both airfares and accommodation inflation will rise strongly in November, pushing up services inflation. These components are volatile so will have little bearing on the MPC’s next meeting.

Ultimately, inflation will remain around 3.5% until January when it’ll drop a little further and then again in April when last year’s regulated price and tax hikes drop out of the annual comparison. This downward path is further helped by the Chancellor’s decision to cut £150 off the average household electricity bill and freeze rail fares, which will bring inflation comfortably below 3%.

We expect the Monetary Policy Committee (MPC) to cut interest rates in a 5-4 vote on Thursday, providing an early Christmas present for mortgage holders.

Since the MPC’s November meeting the data has been dovish. The labour market looks to have continued weakening instead of stabilising and inflation dropped to 3.6% from 3.8%. The UK economy has also contracted for two consecutive months, largely thanks to pre-Budget jitters.

What’s more, the Chancellor has made choices that will lower inflation from April. While the MPC will ‘look-through’ the direct impact of one-off, inflation-reducing measures, lower energy bills should help to lower inflation expectations. Indeed, this has been one of the main reasons the MPC’s hawks have been reluctant to cut. Those measures should help to reduce the likelihood of employees bargaining for bigger pay rises in the months ahead.

Ultimately, financial markets are pricing in a 91% chance of a rate cut this week. There’s been little pushback from the MPC to suggest it’s uncomfortable with that call, so we’re confident that a rate cut is pretty much nailed-on. Looking ahead, we expect one further cut in the first half of 2026, which would leave rates at 3.5% and bring the easing cycle to an end.

Friday’s data is likely to show retail sales probably fell in November, compounding October’s weakness when retail sales fell 1.1 and dampening the Golden Quarter for many retailers.

Consumer confidence fell to -19 from -17 in November as Budget uncertainty ran rife, denting consumers’ willingness to spend. What’s more, the UK saw a third more rainfall than usual in November, which usually impacts retail sales as consumers stay at home.

That said, the BRC measure of retail sales picked up in November once we deflate the data with the BRC’s Shop Price Index, suggesting some upside risk. However, the relationship between the BRC measure and official retail sales can be noisy.

All told, we expect another fall in retail sales in November as households waited to see what the Budget brought for them. The good news is that with this out of the way and little to no near-term tax rises, retail sales should pick up again in the new year.

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