UK Quarterly Economic Outlook – Q4 2025

UK economic performance in the last two years has been compared to a rollercoaster ride. Our 2026 UK Economic Outlook points to some repeat of this, with growth bouncing back in Q1 only to tail off later in the year. With a looser, but improving, labour market, we’re looking at around 1.2% GDP growth − slightly lower than last year’s 1.3%. The key difference for 2026? Lower inflation and interest rates. Will this encourage households to spend a little of their historically high savings?

Read our full report

The 2025 Autumn Budget’s cuts to household energy bills and regulated rail-fare freeze will help lower UK inflation by about 0.3 ppts in 2026. We’ll have to wait until April for inflation to drop below 3%. But, by summer, the headline rate should fall to around 2.3%, before edging up slightly later in the year as services inflation and pay growth continue to weigh heavily. Overall, we forecast inflation to average 2.7% in 2026.

The UK’s unemployment rate rose to 5.1% in 2025. While this is likely the peak, or close to it, the labour market will be subdued in 2026. The Employment Rights Bill and 2025 Autumn Budget are now done deals, ending uncertainty about employment costs, but another sharp rise in the National Minimum Wage (NMW) will keep pay pressure elevated. Wage growth will, however, slow from 4.7% to about 3.5% by year-end, meaning real wage growth stays below 1%.

We expect the Monetary Policy Committee (MPC) to cut interest rates only once in 2026, leaving the base rate at 3.5%, which is close to our estimate of neutral. Sticky wage growth and a stabilising labour market will limit the scope for further easing. For the MPC to cut more than this would mean a sharp slowdown or more obvious loosening in the labour market.

Our main UK economic forecast puts growth at about 1.2%, but there’s room for surprises. If inflation dips further and faster than expected, boosting real incomes, and confidence returns in the absence of the threat of further tax rises, growth could hit 2%. On the flipside, a weaker labour market, stubborn inflation and even more uncertainty over tax hikes could drag growth closer to 0.5%. Although we expect steady growth, the upside and downside scenarios both have roughly a 25% chance of happening.

Economic activity should pick up in Q1 as spending and investment delayed from the second half of 2025 starts to flow. However, UK GDP growth in 2026 will stay weak at about 1.2%. Continued high levels of household saving and low productivity will keep the UK economy stuck in its 1–1.5% growth range. Without productivity-boosting measures, including getting more people into work, there’s little chance of a strong recovery this decade.

In 2026, the UK is expected to return to its usual position – growing slightly faster than the eurozone, but still trailing the US. Global growth should ease to around 3.1%. Inflationary pressures will persist, yet interest-rate paths will diverge: the US Federal Reserve is likely to cut more aggressively, the European Central Bank to hold steady and the Bank of England to move cautiously. Overall, 2026 may feel less dramatic without last year's tariff-driven tensions, but geopolitical risks remain.