Our economic outlook for the United Kingdom

U.K. real GDP grew 0.4% in the second quarter, driven by strength in the services sector and rising business investment. This follows a firm 0.6% print in the first quarter, though seasonal outliers have historically led to higher first-half growth compared with the second half of the year. Activity will likely soften through the rest of the year amid higher energy costs and tighter financial conditions. Nonetheless, risks to our 1.1% full-year GDP call lean to the upside given recent strength in data, including firm purchasing managers’ prints in July and August.

Concurrently, the labor market has shown signs of stabilization, with private payrolls flat and high-frequency surveys pointing to a modest improvement in the second half of the year. This comes after a year and a half of softness as employment adjusted to the government’s tax hikes on firm-level national insurance contributions.

For the inflation outlook, we continue to forecast headline CPI ending the year at 3.1% and core at 2.6%. However, risks are skewed toward a higher inflation trajectory following the recent rise in natural gas prices, which U.K. household energy bills are particularly sensitive to. Longer-term household inflation expectations remain elevated, which is likely a consequence of inflation having not sustainably fallen back to 2% since the 2022 shock triggered by the war in Ukraine.

We continue to expect the Bank of England to keep the bank rate on hold at 3.75% through 2027. However, the escalation in energy prices and stabilization in the labor market mean risks to this view now tilt more hawkish.