Our economic outlook for the United Kingdom
November 11, 2026
Labor market and inflation support further tightening
“Growth has been stronger than expected, and the labor market is showing signs of stabilizing. At the same time, higher energy prices are keeping inflation elevated, creating a case for additional monetary policy tightening.”
Shaan Raithatha,
Vanguard Senior Economist
U.K. economic activity has continued to prove more resilient than expected. Following solid growth of 0.6% in the first quarter and 0.5% in the second, GDP grew a strong 0.7% in the three months through August, the eighth consecutive three-month increase, led by services. Given the strength of recent data, we have increased our 2026 growth forecast to 1.6% from 1.1%. We expect growth of 1.2% in 2027, broadly in line with trend, with resilient domestic activity offsetting the drag from tighter monetary policy and elevated energy prices.
The labor market is also showing signs of stabilizing after a prolonged period of weakness. Payrolls rose in September, and the unemployment rate has fallen to 4.7%, while survey data point to an improvement in permanent hiring. As a result, we have decreased our year-end unemployment rate forecast to 5% from 5.3% for both 2026 and 2027. Wage pressures remain around levels broadly consistent with the monetary policy inflation target, limiting the risk of significant second-round effects from higher energy prices.
Inflationary pressures have nevertheless intensified as the renewed energy shock feeds through to consumer prices. Headline inflation rose to 3.5% in September, while higher energy costs are likely to keep inflation elevated in the near term. We expect core inflation to remain around 2.6% through the end of 2027.
The U.K. budget does not materially change our outlook. The new policies provide modest near-term support to households but little overall demand impulse, while lower fuel duties and value-added tax on electricity should reduce headline inflation by around 0.2 percentage points in the second quarter of 2027.
Against this backdrop, the Bank of England (BoE) raised the bank rate by 25 basis points to 4% at its November meeting. We expect the BoE to deliver one further increase over the next six months. The recent pullback in oil and gas prices, alongside greater market volatility, has reduced the case for further tightening in our base expectation. However, more hikes are likely if market conditions stabilize and/or energy prices rise again.
United Kingdom economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December for each year. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the Bank of England’s bank rate at year-end.
Source: Vanguard.
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