UK Key Themes 2026: Sluggish growth and fiscal worries
With sluggish growth and fiscal worries building, the UK faces another challenging year.
Assuming no historical data revisions, UK GDP growth in 2025 will be around 1.4% – a respectable performance that’s only likely to be bettered by the US and Canada of the G7.
In our view, however, the headline figure flatters the health of the UK economy; we see a much weaker underlying picture. Four themes will be central to the UK’s economic outlook in 2026.
Below is an abridged view of our 2026 UK Key Themes analysis. To view the full report, please complete the form on the right.
2026 UK key theme 1
Fiscal and political risks will remain elevated
Though initial market reaction to the November Budget was favourable, we were critical of the government’s approach. The package lacked a coherent strategy, offering little to promote growth and relying heavily on measures that won’t be implemented until well into the future to reduce borrowing. The Office for Budget Responsibility’s growth forecasts are also up with the most optimistic independent forecaster.
We expect markets will increasingly question both the credibility of the fiscal plans and the stability of the Labour leadership.
A gradual loss of confidence in the UK’s fiscal approach will manifest itself in a slow burn of a steepening yield curve and weaker sterling, but we think the government will find a way to muddle through. Still, that opens the door to the risk of a more sudden loss of faith.
2026 UK key theme 2
The UK lacks a sustainable growth driver
Government spending has played an outsized role in GDP growth in recent years and will do so again in 2026. Prospects for the private sector remain poor.
Consumers face a marked slowdown in real income growth in 2026. At the same time, a combination of low profitability and subdued business confidence will constrain investment.
2026 UK key theme 3
Weak growth and sticky inflation will continue to divide the Monetary Policy Committee
A key uncertainty around the consumer outlook is how sticky inflation will prove to be. Though the CPI rate has likely passed its peak, there’s significant uncertainty around the pace of decline in 2026.
Though we expect UK CPI inflation to cool in 2026, it will remain well above the 2% target. Alongside weak growth, this will stop the MPC from shifting decisively in one direction or the other, which could lead to some volatility in short-end pricing.
2026 UK key theme 4
Another year of pain for the labour market
The labour market remains a key source of uncertainty, not least due to ongoing data-quality challenges. Strong public sector job creation has mitigated the impact of falling private sector headcount, but the boost from the public sector will likely start to fade. Given weak private sector demand, we expect the jobless rate will rise further.
UK 2026 outlook: Sluggish growth
Taken together, these four themes point to a UK economy struggling to find solid footing. There is little evidence of a sustainable growth driver emerging, and few signs that structural weaknesses are being meaningfully addressed. We therefore expect growth to remain sluggish, with our 2026 UK GDP forecast of around 1.0% sitting at the bottom of the consensus range.
Our report UK Key themes 2026: Sluggish growth and fiscal worries, explores these key trends in detail. To request access to the full report, please complete the form.
