UK 2026 ECONOMIC OUTLOOK
Economic outlook
Low growth without any productivity boost
2025 ended up looking a lot like 2024. A strong start to the year gave way to a stagnant second half. 2026 will probably follow a similar, but less extreme, pattern as activity postponed before the Autumn Budget catches up in Q1.
Conditions should improve through the year as inflation slows and interest rates come down a little further. But, growth will still probably average about 1.2% in 2026 before picking up a little to 1.5% in 2027.
The big question is whether households will continue to save at abnormally high levels. That said, there’s little reason to expect the UK to break out of its recent 1−1.5% growth range anytime soon.
2025’s Autumn Budget keeps stop-start economic pattern intact for 2026
The biggest impact of the Budget will probably have been on growth in Q4 last year. Significant drops in borrowing figures, business and consumer confidence surveys all suggest that the UK economy stagnated in Q4. However, most of this activity was probably delayed rather than cancelled. This means Q1 should see a rebound. That’s the pattern we’ve seen in 2024 and 2025.
At the same time, only £0.7bn of the £26.1bn tax increase comes into effect this year. That’ll be more than offset by the £7bn increase in benefits spending. The Budget should therefore offer a small boost to the economy this year at the expense of a bigger drag as we head towards 2030−31.
Does this outlook mean UK households will continue saving at a higher rate?
UK spending growth will rely on more confident consumers
An unusual recent trend is that, despite real household disposable incomes (RHDI) rising by about 6% over the last two years, real consumer spending is flat. This means households are saving much more now than they were before the pandemic.
However, the outlook for disposable income growth looks less rosy over the next couple of years. The labour market has weakened and wage growth will slow a little further, which will drag on income growth. At the same time, inflation will still offset much of the growth in nominal earnings.
Beyond the next few years, incomes should grow a little more quickly as the labour market recovers and inflation slows further. But, the impact of fiscal drag means a broader tax burden will offset much of those gains. The net effect is RHDI is likely to grow by about 0.5% a year over the next couple of years.
That clearly doesn’t set the stage for a great recovery in consumer spending. But, households might be able to reduce their savings a little to offset slower growth in real incomes. There are a few reasons why.
First The lagged effect of lower interest rates will reduce the desire to pay down debt or build up savings − although we don’t expect interest rates to come down much further this year.
Second The recent period of strong savings means that household balance sheets look much stronger. Households’ debt-to-income ratio, for example, is now much lower than before the pandemic, while debt servicing costs have stabilised. That should reduce the need for households to rebuild their savings buffers.
Third Consumer confidence should gradually recover over the year as the unemployment rate ticks down, inflation falls and the housing market recovers. We could see this in the RSM UK Credit Impulse, which tracks household borrowing as a percentage of UK GDP and is a forward indicator of growth. What’s more, if the Budget has been effective in stabilising the public finances, then there should be a much smaller amount of confidence-sapping speculation about tax rises this year.
Admittedly, we aren’t anticipating a large fall in the saving ratio. We expect a drop from 9.5% in Q3 2025 to a little below 9% by the end of 2026. However, that would be enough to allow real consumer spending to rise by a little more than 1% in 2026 before growing a slightly quicker in 2027.
The big picture, though, is that without structural reforms to address productivity growth or encourage more labour participation, the UK economy is unlikely to grow beyond its 1−1.5% range this decade.
