Our economic outlook for the United Kingdom

U.K. real GDP continues to grow faster than expected. GDP increased by 0.4% month over month in July (compared with expectations of no growth) as information and communications boosted the services sector. First- and second-quarter GDP data were robust. This, combined with firm purchasing managers’ index prints, poses an upside risk to our expectation of 1.1% GDP growth for the full year.

The labor market, on the other hand, is showing signs of weakness. Payrolls fell in August, continuing a year and a half of softness as the labor market has adjusted to tax hikes on firm-level national insurance contributions. Survey data indicate that permanent placements are stable, but vacancies appear to be falling. We expect an increase in the unemployment rate to a year-end level around 5.3% from the current 4.9% as the adjustment continues.

Inflationary pressures are rising, with oil prices still elevated. Headline inflation has increased, and supply chain and input cost indicators have rebounded. However, we expect the dominant services measure to remain anchored as wage growth continues to stabilize at broadly target-consistent levels. Accordingly, we anticipate that the key signal of core inflation will remain around 2.6%, above the 2% headline inflation target set by the Bank of England (BoE), through the end of 2027.

The BoE announced on September 17 that it would keep the bank rate on hold at 3.75%, but the tone shifted to being hawkish, with several voters indicating they could support a rate hike if energy costs remain elevated. This shift, combined with our view that core inflation will remain elevated in the medium term, underpins our forecast of a rate hike before the end of 2026 and another in 2027.