UK Economic Outlook 2026

Alongside the central forecast of “lower and slower”, our UK Economic Outlook 2026 included two alternatives based on our risk assessments. This quarterly update shows how the downside scenario, which accounts for geopolitical shocks, now looks to be materialising. While this situation remains highly uncertain, UK growth looks set to slow to around 0.5%, with a real risk of recession, and inflation will start rising again. One key question remains, however: will households reduce their historically high savings rate to cushion inflation’s impact and help keep the economy ticking along?

Rising energy prices due to the Iran conflict mean we expect inflation to fall to 2.8% in April. After July’s big hike to the Ofgem energy price cap, inflation is then likely to peak at 3.5−4% later this year. Overall, we raise our 2026 inflation forecast to 3.4%. However, this could increase further if the conflict continues.

The UK labour market is likely to further weaken as growth slows and firms cut back on hiring in response to elevated energy prices. We now expect the unemployment rate to head towards 5.5% in 2026. Higher inflation also means real-wage growth is now likely to be negative in the latter half of this year.

Our view is that the Monetary Policy Committee (MPC) is likely to balance rising inflation and a fragile labour market by keeping the base rate on hold at 3.75% in 2026. Second-round effects − where firms pass on costs and workers negotiate for wage rises to maintain their real incomes − are less likely than in 2022. However, the risks are clearly skewed towards rate hikes if the MPC fears these will materialise.

Since our central UK Economic Outlook 2026 was published, conflict in the Middle East means its downside scenario is more likely to play out. Even a swift end to the crisis would see lower growth in 2026. This is because damage to the region’s energy infrastructure and disruption in the Strait of Hormuz are already leading to higher inflation, volatility and uncertainty.

The economy started the year on a soft footing, even before the energy price shock. Stagflation is now the base case because of weaker household incomes and a surge in firms’ input costs. We expect growth of just 0.5% in 2026. If energy prices rise further, then a recession is on the table.

The UK will be hit harder by soaring energy prices than both the eurozone and US. This partly reflects how the economy headed into the crisis with little momentum. However, the UK also uses more natural gas to generate electricity than mainland Europe. The Bank of England has had a much tougher time too than the European Central Bank getting inflation back to 2%, which suggests it may have less room to ‘look through’ energy inflation and support weaker demand.