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%.

Inflation has been stickier than expected the last few months. We anticipate that unfavorable comparisons to year-earlier numbers and spikes in regulated price changes will push the Consumer Prices Index (CPI) toward 4% year over year in the next few months. As such, we have increased our forecasts for year-end 2025 headline inflation to 3.8% and core inflation to 3.7%.  

The near-term outlook for the Bank of England (BoE) has become more hawkish. Payroll data revisions suggest the labor market is softening but not collapsing, and the bank has signaled a renewed focus on second-round effects from elevated inflation expectations. That leads us to expect that the BoE won’t cut the bank rate further this year. That would leave the bank rate at its current 4% at year-end 2025. However, with an almost certain tightening of fiscal policy in the autumn budget, we foresee the BoE cutting the bank rate to 3.25% by the end of 2026.