For those hoping for more optimistic 2026, the latest growth figures offer few crumbs of comfort.
The latest data show another contraction in UK GDP, indicating an economy stuck in decline. Monthly data can be noisy, but almost certainly November stats will be just bad as early indicators suggest consumers stayed away from shops because of budget fears. It means that a year that started with a boost to growth is now more spluttering away towards a recession. But, what does 2026 hold? The average consensus for UK growth in 2026 is 1.3-1.4%. Slow and unspectacular.
The grim figures around growth do make interest rate cuts now increasingly likely.
assumes Bank of England cuts rates this week.There is widespread expectation that rates will fall this week. However, a good question to ask – how much will interest rate cuts rescue a struggling economy? There was a very interesting survey about how people feel about interest rate cuts 36% were negative and only 14% were positive. I’ve spent 25 years teaching students that cutting interest rates makes borrowing cheaper and should boost economic growth, but here are British people outside London overwhelmingly saying they don’t like interest rate cuts. This reflects three facts. Firstly, the saving ratio has significantly increased, when interest rates are cut, many see a fall in interest income. These days, fewer people have a mortgage because of the decline in home-ownership. And those who do have a mortgage overwhelmingly have a fixed rate, so they will not be affected for a couple of years. But, also interest rate cuts, will do little to address the fundamental economic problem,s which is the stagnant productivity growth of the past 16 years.
Interest Rate Forecast
The Bank of England’s own forecasts for 2026, offer the prospect of only 1 or two more rate cuts in 2026. The problem is that in 2025, UK inflation proved to be a bigger problem than expected.
The current inflation is not because of strong growth, but reflects structural weaknesses in cost-push pressures. The Bank of England do forecast inflation to fall in 2026, government budget measures will lead to a temporary reduction in some inflation pressures, this will be a little help. But, a big unknown for 2026 is whether the structural problems of UK economy can improve. I would argue the big problem for the UK economy is not a simple lack of demand that can be solved by expansionary fiscal or monetary policy.
A more worrying underlying trend is the decline in industrial production since the pre-covid recovery. This has led to the closure of many manufacturing plants, and industries like steel, chemicals and plastics have struggled. Certainly, high energy costs are a big factor, the long-term pressures of a broken energy market. It is difficult to untangle, the government are investing more in the grid, but at least some of this will feed into higher bills.
One of the UK’s biggest industries is the car industry, but since 2016, it has seen a big drop in output as it struggles to adjust to greater competitiveness from China, and new post-Brexit trading rules. Output is expected to reach a record low this year, though independent forecasters predict a recovery in 2026.
Another source of economic growth in 2026 could be from households who have seen a big rise in savings. Lower interest rates and perhaps an end to debilitating speculation about tax rises could encourage some households to spend more. There is latent spending power from this increase in savings. However, this optimistic prospect is limited by very poor prospects for real disposable income.
Nominal wage growth is slowing down, and after taking into account housing costs and higher taxes, many households will face that new reality of further stagnation in living standards. Of course, like always, there will be a big divide in the economy; the poorest face continued squeeze on living standards in the coming years.
A crucial forecast for living standards in 2026 is forecast for rents. Savills predicts that rent growth will slow down from the breakneck growth of the previous years. For the first time in recent years, household incomes could actually rise faster than rents. This is despite the threat of landlords leaving the market due to new tax changes.
An important factor for the UK economy in 2026 will be the slowdown in net migration. In 2025, we have seen a sharp drop in arrivals and also a small rise in emigration. The surge in population post pandemic was a key factor in the rent surge we saw. You can see the link between net migration, rental demand and rental prices. As net migration slows, so will the pressure on rents.
Borrowing set to rise
However, the decline in net migration will not all be positive from an economic perspective. The OBR forecast that high levels of net migration boost government revenues and improve forecasts for debt. As net migration levels drop, in the short-term it will likely worsen government finances. It is worth bearing in mind how much skilled workers and foreign students contribute from a fiscal perspective. Another worrying trend of 2025, was how often borrowing was worse than forecast. In short-term, the government faces a further forecast rise in health-related benefits, in addition to rise in health and pension, the result is that the forecast rise in tax may continue to be a real burden on the economy and household finances.
As it happened, higher inflation actually gave a boost to tax revenues and the feared blackhole was less than suspected. But, it’s a curious situation where a government relies on inflation to suck people into higher tax revenues and get better fiscal position. The government has a little more fiscal headroom than last year, which is critical to avoid the damaging speculation of recent years. If you were a glass-half-full kind of person, you would say that now the worst of the budget speculation is over, it gives room for an improvement in business and consumer confidence. However, I’m not convinced that British people are the mood for economic optimism, there is an awareness that taxes are set to rise in the future, and even if the inflation rate does fall, it doesn’t change the fact prices have risen 30% in recent years. Also, even if rental inflation falls, it doesn’t change the burden housing places on many people.
Housing
On housing, the outlook is slightly better than a few years ago. Falling real house prices has meant that affordability has actually improved, and with mortgage rates coming down, there is an incentive for people to try and buy if it all possible. I recently wrote a post on house prices forecasts, where I examined why I veered towards a higher house-price forecast. However, after making that video, I did come across this interesting graph by the FT. where if you look at just first time buyers, they have seen much smaller improvements in affordability and basically, which are still near record levels.
Financial stability report
The Bank of England’s latest financial stability report offers some crumbs of comfort. Household debt service ratios are significantly lower than 2008.
For talk of recession, there is not an immediate pressure to cause big drop in demand, which would replicate a really deep recession. Whilst US shares boom, the UK has been left behind, as investors stay away from the UK. In fact, early this year, the Economist ran an interesting piece saying how Britain was actually now a bargain basement offering good value to buy. But, I’m not sure how much foreigners buying up cheap UK assets helps the Uk economy in the long-term. Also, whilst the UK stock market may not look overvalued. A lot of the global economy is resting on the AI boom. If there was to be a crash in AI-shares and fall in AI investment, it would filter through to an economy still heavily reliant on finance. The 2008 credit crunch caused a 30% fall in Sterling because essentially, the economy has shifted from manufacturing to finance so there is a vulnerability to financial markets.
National Minimum Wage
Other things to look out for in 2026, the national minimum wage will rise to a record high level. Combined with higher national insurance and weak demand, it could see unemployment rise faster than official figures, or at least decline in hours work, what I like to call hidden unemployment. It is possible that rising wages could cause a rise in productivity as firms are forced to invest in capital and find ways. It could also just mean worse service when you go to a restaurant or café.
However, another argument is that the minimum wage has caused wage compression; there is now little incentive to take on more responsibility because the increase in pay is tiny, and actually, this is a big factor holding back productivity.
Video Version
Overall, many of the long-term structural challenges of the economy remain unaddressed, and so 2026 will be another case of weak growth, with only marginal increase in GDP per capita. It is hard to see a big boom from other areas of the global economy. For more detail on what will happen to the housing market, this video goes into more details.
Related
Sources
https://www.savills.co.uk/research_articles/229130/382250-0
https://obr.uk/forecasts-in-depth/the-economy-forecast/income/#disposable
https://www.bankofengland.co.uk/monetary-policy-report/2025/november-2025
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