What is the outlook for the UK economy in 2026?

In the face of many challenges, the UK economy proved to be more robust than many thought in 2025. While inflation was above target, productivity growth sluggish and higher National Insurance contributions meant greater costs for employers, we estimate that GDP grew by 1.4% over the course of the year. What does 2026 hold?

The outlook for growth in 2026

In 2025, UK growth was 1.4% and the outlook for 2026 is similarly positive. We estimate that the economy will grow by a respectable 1.3%, ahead of other G7 countries, including Germany and France, but off the pace of the US, where AI investment is really pushing the economy forward.

That said, there are some potential challenges. We have seen a marked loosening of labour market conditions – in Q3 2025 the unemployment rate reached its highest level since March 2016 (excluding the pandemic), and the volume of job vacancies has been on a long downward trend – that has only recently bottomed out.
 

Inflation is already starting to fall

Higher food prices, the imposition of VAT on private school fees and a large rise in water bills for homes in England contributed to a minor upswing in inflation last year, which saw it peak at 3.8%. However, some of these aggravating factors have already started to wane. Water bills, for example, will rise again this year but only by 5%, compared with the 26% rise in 2025.

One of the most significant factors driving inflation is wage growth. But one consequence of a loosening labour market is that wage growth is declining. This should ease what is the biggest determinant of costs increases for service providers and help push inflation downwards. Inflation has already started to fall, and while it may not reach the Bank of England’s target rate of 2% by the end of the year, it should do during 2027.
 

Interest rates are falling too

It looks like it will take some time to reach the end point for this cycle, but interest rates should also continue to fall. The Bank of England cut its base rate four times in 2025. At 3.75%, it is 150 basis points below the peak of 5.25% in 2024, and we are forecasting two more rate cuts in 2026 to finish the year at 3.25%.

If we look at market pricing, there’s an expectation that inflation will remain higher and that interest rates could start to rise again between the end of this year and 2030. We don’t believe this will be the case and believe one more cut in 2027 is likely, taking the base rate to a ‘neutral’ 3% (where the rate neither excessive stimulates nor unduly weighs on economic demand).

Could mortgage rates go lower?

Based on our expectations that interest rates could be cut further, we believe this could also mean a further reduction in mortgage rates in future.

Interest-rate swaps, which form the basis of mortgage-rate pricing, have already dropped quite significantly in the last few years. In principle, swap rates reflect expectations for the Bank of England’s policy rate, but they are also influenced by the longer-term outlook. In the next two or three years, we believe mortgage rates could come down by another 50 basis points or so.
 

Optimism in the housing market

Looking specifically at the environment for properties and mortgages, the housing market appears to have shrugged off negativity and there are positive signs for the year ahead.

The latest RICS residential market survey showed that three-month sales expectations were +22% (up from -4% the previous month), the most upbeat reading since October 2024.  The average asking price, according to Rightmove, rose 2.8% between December 2025 and January 2026 (up £9,893 to £368,031), the largest increase for any month since June 2015.

Can this momentum be maintained? The UK government has pledged that 1.5 million new homes will be built over the course of this parliament, equivalent to 300,000 homes per year. This would be positive for property market transactions and the economy, but there has not been any significant lift in construction or planning applications or approvals yet. However, relaxation of some planning restrictions could become increasingly helpful.
 

The biggest risk factor is politics

One of the biggest risk factors for the UK outlook is political volatility. In the UK, local elections will take place in May, and there is continued speculation as to whether the current prime minister will face a leadership challenge from within his own party.

Financial markets are wary of any change that could make the UK less reliable as a borrower, and gilt yields will rise if people are less willing to buy government debt. This can be exacerbated by issues such as any volatility in US tariffs and further geopolitical uncertainty.

With these risks in mind, though, we expect a similar year for the UK in terms of economic performance. At the same time, the housing market is likely to prove resilient to domestic challenges.

¹ Source: RICS UK Residential Market Survey December 2025
² Source: Right Move House Price Index January 2026

This article is for general information purposes only and should not be used or relied upon as professional advice. It is advisable to contact a professional adviser if you need financial advice.