Our economic outlook for the United Kingdom

The U.K. economy has grown close to its potential over the past year, with economic activity balanced across consumer spending, government spending, and business investment. The resilience in activity is encouraging given the uncertain global trade environment and a weakening labor market.

However, we expect a downshift in growth in 2026, driven by tighter fiscal policy, as taxes rise to meet the government’s fiscal rules. We expect a fiscal consolidation of at least £30 billion to be announced in the autumn budget, driven by tax increases. We believe this will detract around 0.2 percentage points from growth and, as such, we forecast U.K. GDP growth of just 0.8% in 2026.

The main challenge for the Bank of England (BoE) is to balance this weakening growth outlook with still-elevated inflation. Annual headline inflation is expected to end 2025 at 3.8%, almost double that of the euro area as well as the BoE’s target (both 2%). However, more than 70% of the U.K. inflation gap with the euro area can be explained by the contributions of administered or index-linked prices, including electricity, water, and telecommunications bills. An additional 20% of the gap can be attributed to U.K.-specific dynamics in the rental market, package holidays, and food prices.

We forecast that the total U.K. inflation gap with the euro area will narrow by around half in 2026 as announced policy measures directly lower energy prices and as base effects, or challenging year-earlier comparisons, for some of these components unwind.