Our economic outlook for the United Kingdom
June 12, 2026
Soft recent data skew risks toward fewer rate hikes
“The energy shock stemming from the Middle East conflict will raise inflation and lower growth in the U.K. We expect the Bank of England to hike twice in response. But following a soft set of recent labor market and inflation data, risks are skewed toward a more muted monetary policy reaction.”
Shaan Raithatha,
Vanguard Senior Economist
The continuing energy shock remains the key driver of our U.K. outlook. The economy stands on firm footing after a strong first quarter, leading us to recently upgrade our 2026 growth forecast to 1.1%. We see this momentum carrying through early in the second quarter.
However, we anticipate a slowdown in the second half of the year as higher energy costs and tighter financial conditions weigh on activity. Conditions will likely ease through 2027, and we forecast 1.2% growth for next year as monetary policy relaxes back toward current levels after some near-term tightening later this year.
Prices are accelerating amid the Middle East conflict. Inflation expectations remain elevated given sticky inflation levels since 2022, and there is some evidence that firms may be passing on higher input costs to consumers. That said, with a weak labor market and a recent soft spot in inflation data, risks to our call for two hikes from the Bank of England now skew toward less tightening.
The outlook for fiscal policy is highly dependent on whether the current prime minister remains in office or is replaced by someone with a desire to increase public spending. The latter outcome would be good for the economy in the short term but may lead to a sharp tightening in financial conditions amid potential concerns about fiscal credibility, which would weigh on growth in the medium term.
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, as of December for each year. Monetary policy is the Bank of England’s bank rate at year-end.
Source: Vanguard.
Financial conditions are tight amid Middle East conflict and fiscal uncertainty
Notes: This chart shows 10-year gilt yields for the period from January 2020 to June 2026. Dashed lines indicate the respective beginnings of two specified shocks: February 24, 2022, for the conflict in Ukraine and February 28, 2026, for the conflict in the Middle East.
Source: Bloomberg, as of June 4, 2026.
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