Our economic outlook for the United Kingdom

The energy shock from the conflict in the Middle East remains the key driver of our U.K. outlook, although developments have evolved broadly in line with our base case. Following a strong first quarter, driven by private and public consumption, we leave our 2026 growth forecast unchanged at 1.1%. We expect activity to soften through the remainder of the year as higher energy costs and tighter financial conditions weigh on demand. Growth should remain broadly stable around 1.2% in 2027 as the drag from the energy shock fades and monetary policy gradually eases.

Inflation dynamics remain at the center of our outlook. While headline inflation has eased in recent months, this masks a sharp pickup in energy and food inflation linked to the Middle East conflict, offset by softer services inflation. We remain concerned that inflation expectations have not fully reset following the inflation surge of recent years, and there is evidence that firms may pass higher input costs on to consumers rather than absorb them in profit margins. These factors underpin our expectations for two Bank of England rate hikes this year. That said, moderating wage growth and softer labor market conditions suggest the risks around our forecast skew toward a less hawkish policy response.

The outlook for fiscal policy has become more uncertain following the recent change in political leadership. Although our base case assumes little change to the current fiscal trajectory, fiscal policy is likely to be a key source of uncertainty for the U.K. economy over the coming year.