UK ECONOMIC OUTLOOK 2026
The UK vs global economy
Will 2026 be less eventful than 2025?
The UK economy was quick off the blocks compared to other G7 economies in 2025, before falling behind in the second half of the year. This year should see the UK resume its usual middle-of-the-pack position: quicker growth than the eurozone, but unable to keep pace with the US.
Despite the UK’s bumper first half of the year, growth slowed in the second half of 2025. The UK’s annual rate should come in around 1.3% for 2025. This would put the UK at the bottom of the pack because growth in the eurozone consistently surprised to the upside last year. Fortunately, that shouldn’t last for long. We expect the UK to reclaim second place this year.
Global growth is expected to slow marginally to 3.1% in 2026, according to the IMF. The worst of the impact from US tariffs seems to have been averted through trade agreements and suspensions, leaving the US top of the rankings again.
In Europe, tariffs will weigh on growth, despite the recent trade deal. However, a huge increase in defence and infrastructure spending should keep the continent’s growth ticking along, with Germany’s fiscal plans helping to revive Europe’s largest economy.
Taking a mid-ranking position, the UK should resume business as usual given that the recent Autumn Budget avoided a near-term fiscal contraction.
Interest rates and inflation diverge in G7
Inflationary pressures are likely to remain stubborn in the US as the impact of tariffs continues to drip-feed into higher prices. Meanwhile, eurozone inflation looks set to undershoot the 2% target as a stronger euro continues to make imports cheaper.
These stubborn price pressures in the US have contrasted with a weakening jobs market and political pressure for the Federal Reserve (Fed) to continue to cut interest rates throughout last year and well into this year. Indeed, the Fed probably has two more cuts to go this year, but the European Central Bank (ECB) has already signalled its easing cycle is over. We think the Bank of England and ECB would need to see some significant shifts in the data to be convinced to cut rates much further.
The bigger picture is that lower migration, ageing populations and global conflict (both trade and war) will keep both inflation and interest rates higher than the lows we were used to before the pandemic, which will keep the pressure on government budgets for the rest of the decade.
