UK QUARTERLY ECONOMIC OUTLOOK | Q4 2025
Risks to the outlook
Exploring alternative UK economic scenarios for the year ahead
Our central forecast relies on a few probable, but by no means guaranteed, assumptions. We’ve therefore illustrated what might happen if the economy were to take a couple of different paths – one more positive and one more negative. On the upside, a combination of strong wage growth, lower energy prices and returning confidence could propel UK growth close to 2%. On the downside, a persistently weak labour market, sticky inflation and another round of chaotic tax increases could pull growth down to almost zero. Ultimately, we’re confident in our base case, but assign a 25% probability to each of these scenarios materialising over the next 12 months.
Goldilocks and the Bear
Alongside our central forecast, we’ve mapped out an upside and downside scenario that’ll help to illustrate the risks around the UK’s economic outlook.
A more positive outcome
Starting with the upside scenario, we think there’s a good chance that Q4 2025’s poor performance amid the Autumn Budget uncertainty reverses in Q1 2026. This would give the economy a strong start to the year.
What’s more, the oil glut on global markets could pull prices down further, which would weigh on inflation and boost real incomes, while allowing the Bank of England (BoE) to continue cutting interest rates. At the same time, the labour market could start to recover now that the Budget has been passed and the Employment Rights Bill has been amended. The final piece to the puzzle would be a recovery in both consumer and business confidence in the absence of the need for further tax rises.
In this ‘Goldilocks’ scenario, growth could get as high as 2%, but the likelihood of all these factors coming together is slim.
A more negative outcome
Turning to the downside scenario, if the weakening in the labour market is largely structural then that could continue well into next year, weighing on household incomes. At the same time, another bout of geopolitical instability could send commodity prices higher, further eroding real incomes and preventing the BoE from cutting interest rates. Finally, another round of chaotic tax increases would keep household savings high and business investment subdued.
Were all of this to materialise, then we think the economy would eke out just 0.5% growth this year.
Fundamentally, the likelihood of every aspect of either of these scenarios materialising is slim. They simply illustrate some of the potential risks facing the UK economy heading into the coming year. We’ll be revisiting these scenarios, or aspects of them, throughout the year to see which is most consistent with how the economy is developing. In the meantime, we expect the economy to continue to grow by around 1.2% this year because the UK, all things being equal, remains rangebound to 1−1.5% growth for the rest of the decade.
