UK 2026 ECONOMIC OUTLOOK
A word from our economist
Will 2026 be a repeat of the past two years?
While the UK economy in 2026 should feel calmer, uncertainty remains a key theme. Twelve months in economics is a long time. So, for this 2026 UK Economic Outlook, we've included upside and downside scenarios to help you assess risks for the coming year. Either way, 'lower and slower' is our forecast for 2026 before a possible upturn in 2027.
The UK economy did manage decent growth of about 1.3% in 2025, despite the barrage of headwinds from tariffs and taxes. However, the real economy – the part that makes, does and serves – did suffer in the second half, as our Real Economy Barometer showed.
Yet, the outlook for consumers is tougher. A weaker labour market compared to last year will drag on real wage gains, which'll squeeze spending power. The biggest question for this year, then, is whether households will continue to save at elevated rates or offset weaker incomes by saving less.
There’s reason to think they could choose the second of those two options. Lower interest rates will be less of an incentive to save while household balance sheets look healthy and, at 9.5%, the saving ratio is historically high. This would give households plenty of fallback room without savings being depleted by high inflation. Of course, much depends on whether consumer confidence can recover from its Budget-induced slump.
In any case, government spending should continue to support growth this year. Now its measures are clear, the Autumn Budget could boost total demand slightly. That’s because public spending increases come into effect before tax increases.
At the same time, headline inflation will likely slow sharply from April. But, services inflation looks set to remain sticky. Wage growth is also unlikely to slow that much further through 2026 due to increases in the National Minimum Wage (NMW) and high levels of inactivity. This makes it unlikely the Bank of England can cut interest rates much further. Our base case is that the UK economy should grow by 1.2% this year, which is only a little slower than last year. Lower inflation and interest rates, combined with the fading impact of the large increase in employment taxes and the uncertainty from 2025, could mean that 2027 looks materially better.
