OECD Economic Outlook, Volume 2026 Issue 1

United Kingdom

Growth will weaken to 0.9% in 2026, as renewed inflationary pressures squeeze real incomes and exacerbate uncertainty, weighing on private consumption and investment. It will then pick up to 1.1% in 2027, helped by the normalisation of global energy prices and a gradual improvement in trade and financial conditions. Consumer price inflation is set to increase to 3.7% in 2026 before moderating to 2.4% in 2027, while core inflation will continue easing as wage growth moderates, due to rising slack in the labour market. The unemployment rate is projected to reach 5.5% in 2026 before edging down to 5.3% in 2027.

Further easing in monetary policy is expected, with the Bank of England looking through the energy shock in 2026 and moving to a neutral stance in 2027 as underlying price pressures ease. Fiscal policy will remain restrictive, given elevated borrowing costs, high debt interest payments and rising public debt. Continuing to reduce vulnerability to imported energy price inflation is essential, including by better aligning price signals and accelerating investment in electricity networks and system flexibility. Swiftly completing the ongoing planning reform would support infrastructure delivery and enhance growth.

Momentum is shifting as prices rise again

Economic activity has picked up after a weak second half of 2025 and before the onset of the evolving conflict in the Middle East. Flash estimates indicate that GDP grew by 0.6% in the first quarter of 2026, driven by a strong rebound in the services sector. Momentum has been shifting since March, with consumer confidence dropping to its lowest level since late 2023. Bank Rate was held at 3.75% in April, with upward pressure on borrowing costs for households and the government. Labour demand continued to slow, especially in sectors most exposed to higher minimum wages. The unemployment rate, at 5.0% in the three months to March, is higher than a year earlier, even though the rise in labour supply has levelled off. Health-related inactivity remains structurally high and net inward migration continues to fall.

Renewed imported price pressures owing to the evolving conflict in the Middle East are interrupting the gradual decline in consumer price inflation. Annual producer input price inflation surged by 5.3% in March and 7.7% in April due to higher prices for imported fuels and materials. This reflects the economy’s vulnerability to global energy market volatility, owing to a combination of high dependence on natural gas for energy generation, low storage and hedging, and the decline in the sterling effective exchange rate since January. Headline inflation edged up to 3.3% in March, adding to already-high inflation expectations, before dropping to 2.8% in April, reflecting the implementation of measures from the Autumn Budget that lower the cost of energy and fuel. At the same time, domestic price pressures are easing steadily due to the continued loosening of the labour market. The aggregate effective tariff rate faced by domestic goods exporters in US markets is broadly unchanged, despite the recent US Supreme Court ruling.

United Kingdom 1

1. Consumer prices excluding energy, food, alcohol and tobacco.

2. Monthly wages and salaries survey (MWSS) estimate of average weekly earnings (AWE) for private sector regular pay in Great Britain.

3. UK composite purchasing manager indexes; values above 50 indicate expansion.

Source: S&P Global; and Office for National Statistics.

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United Kingdom: Demand, output and prices

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United Kingdom 2

Source: OECD Economic Outlook 119 database.

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The monetary stance will become neutral while fiscal policy remains restrictive

Bank Rate is projected to be held at its current value until the first quarter of 2027, before being cut to 3.5% as monetary policy moves towards a neutral stance, reducing but not eliminating the drag on growth. The Bank of England is expected to look through the energy price shock in 2026, as the surge in imported inflation is expected to be transitory and the growing slack in the labour market moderates domestic price pressures. The bank is also assumed to continue unwinding the stock of assets held for monetary policy purposes in the Asset Purchase Facility, with the GBP 70 billion target for gilt stock reduction over the 12-month period to September 2026 renewed for another year.

The fiscal stance will remain restrictive, with projected consolidation of about 1.5% of potential GDP over 2025-27. The general government financial deficit will improve from 5.5% of GDP in 2025 to 5.1% in 2026 and 4.4% in 2027, as the government complies with the fiscal rules. The government announced means-tested budgetary transfers of about GBP 50 million (negligible as a share of GDP) for households relying on heating oil, while strongly committing to keep energy support measures targeted and temporary. Instead, it is focusing on structural measures to accelerate the net zero transition and to prevent profiteering. It also raised the tax on excess profits of electricity generators due to the gas price spikes from 45% to 55%. Yet, debt interest payments remain elevated at close to 3% of GDP, while defence spending is set to reach 2.6% of GDP by 2027, about 0.3% points higher than in 2025. General government gross debt will continue rising in the short term, from 102.3% of GDP in 2025 to 105.4% in 2027, though the government’s fiscal plans entail a stabilisation from 2030.

Growth will moderate temporarily

GDP growth will moderate to 0.9% in 2026 before picking up to 1.1% in 2027. Private consumption and investment are projected to weaken in the near term due to the evolving conflict in the Middle East, as real disposable income stagnates and uncertainty remains elevated. By contrast, public expenditure will support the economy, due to both the automatic fiscal stabilisers and planned increases in government investment. Lower interest rates and a gradual improvement in global trade growth are expected to start providing moderate tailwinds in 2027, but long-standing supply constraints, including sluggish labour productivity growth and slowing inward migration, will continue to act as a drag. The rise in consumer price inflation is expected to peak in the second half of 2026, as higher energy prices pass through consumer prices, including through the increase in administered energy prices in July, and then subside as global energy prices ease, but remain above target at 2.4% in 2027. Core inflation will continue to decline steadily, as labour market slack grows, albeit at a slower pace than in the second half of 2025, due to the pass-through of higher fuel costs into other prices, sticking at 2.7% in 2027.

Significant exposure to volatility in global energy prices is a key risk. The limited fiscal space for the government to attenuate the impact of higher energy prices on low-income households adds downside risk to output, especially in case of renewed imported inflationary pressures over the winter. High inflation expectations and potential second-round effects remain an upside risk to prices, as well as to output as it could require the monetary stance to remain tighter for longer. Prolonged constraints on fertiliser supply pose further upside risks to prices, given the salience of food items for household inflation expectations. In addition, localised shortages of diesel could weigh on activity, especially in rural areas, and low jet fuel inventories constitute a downside output risk in high-value trade sectors, such as the pharmaceutical industry, and in tourism. Relatively high excess savings remain an upside risk to private consumption and housing investment.

Reducing exposure to gas price volatility would support macroeconomic stability

Continuing to strengthen energy security is essential to lower vulnerability to global energy price shocks. Correcting price signals that slow electrification, accelerating the expansion of grid capacity and strengthening short-term flexibility would enable clean generation to displace natural gas reliably. The ongoing fiscal consolidation through a combination of revenue-raising measures, spending cuts, and productivity-enhancing investments remains necessary to rebuild buffers, but careful design is needed to avoid adverse pro-cyclical effects on either near-term growth or inflation. At the same time, planned structural reforms to further expand supply remain necessary, including delivering on the overhaul of infrastructure planning and the simplification of financial services regulation.