Our economic outlook for the United Kingdom

The U.K. economy remains fundamentally fragile despite a stronger-than-expected GDP print in the second quarter. GDP grew by 0.3% quarter-on-quarter, outperforming consensus expectations. However, this upside surprise was largely driven by a temporary spike in government-related expenditures, while consumer spending remained subdued. In response, we recently mechanically upgraded our 2025 growth forecast by 0.2 percentage points to 1.3%, though we continue to expect the economy to remain weak in the second half of the year.

The U.K. chancellor of the exchequer’s £10 billion fiscal headroom is likely to be wiped out ahead of the autumn budget, driven by policy developments and expected downgrades to near-term and trend growth by the Office for Budget Responsibility. Further tightening in fiscal policy appears inevitable and is a key reason for our below-consensus 2026 growth forecast of around 0.8%.

With signs of the labor market cooling and wage inflation easing, we expect a gradual decline in services inflation, which has hovered around 5% in recent months. We anticipate that both headline and core inflation will end 2026 just above 2%.

Additionally, we expect the Bank of England to maintain a quarterly pace of easing, with the bank rate falling from 4% currently to 3.75% at year-end 2025 and to 3.25% by mid-2026.