Growth is expected to reach 1.1% in 2026, down from 1.4% in 2025, the latter benefiting from an exceptionally strong first quarter. However, GDP growth is likely to be unevenly distributed. On the one hand, the service sector is likely to gain from advancements in AI. On the other hand, households will suffer from the deterioration of the labour market, while the industrial sector will face penalties from reduced competitiveness and increased competition from China. Disinflation is expected to progress gradually, which will restrict the BoE's ability to ease monetary policy. The policy mix will be more accommodative, with part of the fiscal consolidation effort postponed until the end of the decade. We foresee a slight depreciation of the sterling against the euro and the dollar in 2026, driven by lower key interest rates in the United Kingdom.
Growth: investment more dynamic than consumption
A cyberattack on Land Rover negatively impacted Q3 growth (-0.06 pp, +0.1% q/q), masking the otherwise resilient economy. Investment in machinery and equipment, excluding transport, rebounded strongly (+10.1% q/q). Furthermore, the return of the manufacturing PMI to expansion territory in November (50.2) bodes well for Q4, when GDP growth is expected to rebound (+0.3% q/q). Growth is expected to average 1.4% annually in 2025. Although it is likely to be lower in 2026 (at 1.1%), this is primarily due to the exceptional performance in Q1 2025 (+0.7% q/q), which was supported by volatile components (mainly investment in aeronautics). Quarterly growth is projected to maintain an average of +0.3% q/q, which is in line with the rate expected for Q4 2025.
GROWTH AND INFLATION (YEARLY AVERAGE)In 2026, the UK is poised to benefit from renewed growth in the major eurozone countries, particularly Germany and France, which accounted for 15% of UK exports in Q3 2025. This growth is expected to be driven by increased defence budgets. Investment momentum is expected to continue. The British economy is benefiting from the boom in digital and tech services, where it continues to maintain a competitive edge, as evidenced by investment in intellectual property exceeding 5% of GDP in Q3 2025. This sector is also generating significant added value (+6.3% y/y in the information and communication sector), alongside substantial trade surpluses (GBP 207 billion in Q3 2025, on a year-on-year cumulative basis). However, this investment momentum will be hindered by a decline in investment in struggling industrial sectors that are facing production overcapacity, such as chemicals, plastics and steel. More broadly, business activity continues to be constrained by escalating labour costs and ongoing margin erosion, which stood at 23.7% of value added in Q3 2025, marking the lowest level since 2007.
UNITED KINGDOM: MANUFACTURING PMI AND CONSUMER/PRODUCER PRICESHousehold spending intentions, encompassing both consumption and investment, are also less positive. These intentions are adversely affected by the deterioration in the labour market, the prevailing climate of uncertainty, particularly regarding fiscal policy and trade tensions, which are undermining household confidence.
Labour market: deterioration expected to continue
The unemployment rate reached 5% in October, marking its highest level since 2021. The decline has been noticeable since the beginning of the year (+0.6 pp) and the negative trends observed in various surveys (REC/KPMG, Deloitte CFO) indicate that the unemployment rate could continue to rise, reaching 5.5% in 2026, especially as growth is expected to be unevenly distributed across sectors. The United Kingdom is also facing specific sectoral dynamics post-Brexit: in contrast to the eurozone, traditionally strong sectors such as finance and insurance have suffered net job losses in the UK. The rise in unemployment is also likely to impact wages: wage growth in the private sector, excluding bonuses (which stood at 3.8% year-on-year in September), is expected to slow gradually to between 3.0% and 3.5% in 2026. This trend will aid disinflation and assist companies in their efforts to restore profit margins, while household purchasing power is expected to remain positive in 2026 (around 1%), as lower inflation counterbalances the slower wage growth.
Disinflation is expected to accelerate
Inflation remains relatively widespread, with nearly 60% of the components of the consumer price index exceeding 4% y/y in October. However, according to our forecasts, inflation is expected to decrease significantly by the end of 2026 (to 2.2% in Q4 from 3.6% y/y in October 2025), thereby aligning more closely with the BoE's target. Inflation in services – the main driver of price rises – is expected to slow, particularly from April 2026 onwards, due to favourable base effects (the diminishing impact of the April 2025 fiscal measures, especially the tax on electric vehicles; and the substantial past increase in airfares).
An earlier and more pronounced slowdown in inflation cannot be ruled out (see chart). Faced with weak demand and international competition (this autumn, the United Kingdom became the primary export market for Chinese car manufacturers), companies' pricing power has indeed been eroded, as indicated by the companies surveyed in the November PMI report. This presents a downside risk to inflation, which our scenario of stable energy prices on international markets is unlikely to counteract.
Monetary policy: gradual easing
The BoE is expected to continue its gradual easing of monetary policy. Two further cuts are expected in December 2025 and then in Q1 2026, reflecting a cautious approach in a context of still relatively high inflation. Consequently, monetary policy would remain restrictive: an interest rate of 3.5% at the end of Q1 2026 would exceed our estimated neutral rate range [2.25-3.25%]. With more pronounced disinflation, two further cuts would occur in H1 2027. Some members of the Monetary Policy Committee already contend that monetary policy is currently too restrictive in view of the economic slowdown. The risks are therefore on the downside compared to our central scenario for key interest rates.
As announced in September, the BoE will continue to reduce the size of its balance sheet in 2026 (by GBP 70 billion over the period from October 2025 to September 2026), albeit at a slower pace than in 2025 (GBP 100 billion between October 2024 and September 2025), due to the pressures on the long end of the yield curve. Unlike other central banks, the BoE does not confine itself to maturing securities but actively sells its securities on the secondary market. While short-term UK bond yields are expected to continue their downward trend as a result of monetary easing, long-term rates are projected to remain constrained at the start of the year (4.5% in Q1 for 10-year rates) due to political uncertainty associated with the local elections in May, before experiencing a more significant decline in the second half of the year (4.3% in Q4 2026).
Public finances: the budget passes, but uncertainties remain
Fiscal policy is projected to remain moderately restrictive in 2026. However, this will not be enough at this stage to stabilise the debt ratio, which is expected to reach 103.3% of GDP (up from 101.3% in 2024). Nevertheless, the debt trajectory remains under control and ongoing fiscal consolidation efforts would help to slow the rise in this ratio in the coming years.
However, in light of the autumn budget, the government has not managed to rule out the possibility of resorting to new consolidation measures in the near future to comply with its own budgetary rules. The fiscal headroom available to the government to restore the current budget balance to equilibrium by 2029-2030 has increased (from GBP 9.9 billion to GBP 21.7 billion), but it remains limited given the OBR's robust assumptions regarding i/ the growth scenario (+1.5% in 2026 and +1.4% in 2027, compared with +1.1% and +1.3% in our scenario, respectively) and ii/ the anticipated changes in certain indicators (a reduction in the savings rate, a decrease in the unemployment rate, and a rebound in residential construction in 2027).
The proposed tax increases (GBP 28 billion by 2029-2030) are expected to primarily take effect towards the end of the decade, while spending will increase from 2026 onwards. Although the final outcome is encouraging, with significant consolidation anticipated by 2030 (the OBR predicts a deficit of 2.4% of GDP at that date, compared with 5.0% in 2025 and 4.1% in 2026), this imbalance carries the risk of delaying and complicating consolidation efforts, particularly with the impending increase in the apparent interest rate (which we project will exceed nominal growth from 2029 onwards). The OBR’s projections indicate that the public deficit will fall to 3.6% of GDP in 2027. Given our more conservative growth scenario, the risks point to a deterioration of the deficit in the short term.
Foreign trade is set to gain from advancements in AI and technology
The trade deficit continues to worsen, reaching GBP 235.4 billion in Q3 on a twelve-month cumulative basis, marking a record high. Exports to the United States, and cars in particular, have been adversely affected by rising tariffs. However, bilateral negotiations are making headway, and certain sectors are expected to enjoy more favourable conditions in 2026, particularly pharmaceuticals, which have had the exemption from US tariffs on British pharmaceutical imports made permanent. This sector accounts for 10% of UK exports. Current trade agreements with India and Europe, including discussions on rearmament and the SAFE programme, are inadequate to counterbalance the effects of Brexit.
Despite this, the surplus in services continues to grow, amounting to GBP 206.9 billion in Q3, which helps mitigate much of the goods deficit. As a result, the current account deficit, which stood at 2.6% of GDP in Q2 2025, is under control and is expected to remain so in 2026. Service exports, which are one of the UK's strengths, will increasingly serve as a buffer against economic shocks, particularly due to the boom in digital and tech investments on both sides of the Atlantic. Exports in this sector, including information and communication services, charges for the use of intellectual property, and management/consulting services, saw a notable increase in 2025, with an 11.4% year-on-year growth for the first nine months of 2025 compared to the same period in 2024. Furthermore, the ambitious national strategy for component manufacturing and quantum computing is expected to bolster export growth.
Article completed on 3 December 2025 (with the assistance of Benjamin Puiseux, intern)
