Executive Summary - Normality Under Strain

The UK economy begins 2026 in a state closer to normal than at any other point this decade, despite heightened geopolitical stress. While growth momentum has slowed since early 2025, and inflation remains significantly above target, the outlook over the year ahead is more favourable than in recent years. At the same time, the government has navigated its way to meeting the fiscal rules following the tax increases announced in the November Budget. Our central forecast is for GDP growth of 1.4 per cent in 2026, slightly above our estimate of trend. Inflation is set to fall sharply in April, as last year's energy and food price increases drop out of the annual comparison. We expect Bank Rate to be cut to 3.25 per cent by the end of the year, our estimate of the neutral rate. Yet significant challenges remain. At the global level, geopolitical tensions have intensified markedly. Tariff announcements, US actions in Venezuela, tensions over Greenland, and renewed concerns about Iran all point to a more fractured and unpredictable international environment. Combined with the possibility of an equity market correction in the United States, downside risks to global growth are especially pronounced. Labour market dynamics sit at the heart of the UK macroeconomic outlook. Key issues include how much of the slowing in the jobs market reflects cyclical cooling versus a structural change – and therefore how much effective downward pressure will emerge on wage growth; the cumulative impact of recent policy interventions, particularly for lower–paid and younger workers; and the extent to which AI adoption is affecting hiring decisions and job matching behaviour. These developments have important implications for both monetary policy and the public finances.