UK Economic Outlook: Slowed Growth and Manageable Risks

Looking ahead, we think the United Kingdom’s economy will show resilience through 2026.

We project a stagflationary impact from conflict in the Middle East will shave 0.2 percentage points off growth. However, it’s a temporary challenge the economy will weather.

Other challenges to the UK’s economic outlook include slower rate cuts, a mid-year inflation spike, and a cooling labor market. Although these factors will weigh on economic performance, long-term prospects remain positive.

Here, we’ll break down factors influencing the United Kingdom’s economy. For a deeper look at Morningstar’s economic forecasts and how they affect investors, download the quarterly Economic Outlook report.

The conflict in the Middle East, which began in early 2026, has led to a temporary price shock and stagflationary pressure. Still, we predict the consequences for the UK will be manageable, with price growth reverting as energy markets stabilize.

After headline-grabbing events, advisors can help keep investors focused on their long-term goals over short-term fluctuations. Consider any rebalancing decisions within the context of a client’s overall risk tolerance to help stay on track.

We forecast GDP growth will slow to 0.8% in 2026. Last year’s budget shaped up as less of a near-term growth headwind than we’d previously anticipated. However, a mid-year inflation spike and a weak labor market weigh on consumption and investment.

A revised government spending outlook accounts for the lion’s share of our GDP growth forecast revisions over 2027-30. Updated fiscal forecasts suggest higher government spending in 2027 than we previously factored, and lower spending in subsequent years.

We economic growth to recover over the 2026 to 2030 period. The adoption of artificial intelligence should further hasten productivity growth for the 2031 to 2035 period.

Advisors and wealth managers can stress-test client portfolios under forecasted scenarios to evaluate potential effects. Visualizing the range of potential outcomes can help clients feel more confident in the resilience of their portfolios.

Inflation will rear its ugly head once more in 2026, peaking up near 2.65% mid-year, driven by energy price increases from the Middle East conflict. Disinflation is likely to play out more gradually than we previously predicted.

Still, we forecast annual headline CPI inflation—the rate closely monitored by the Bank of England—to drop to 2.2% by year-end 2026, down from 3.3% a year earlier.

While we expect inflation to remain above the BOE’s 2% target for most of 2026, we also predict it will revert to target by early 2027 as temporary pressures subside. Wider economic slack in the coming year should also help slow price growth.

Source: Office for National Statistics (UK), Morningstar estimates, Enverus. Based on energy futures prices as of Feb. 7, 2026

For investors looking to offset inflation, advisors can look to diversify and supplement income sources with select growth assets. In 2026, UK equities may offer attractive yields supported by sector exposure to financials and consumer staples and limited representation in expensive technology stocks.

We think the Bank of England will remain cautious in the latter half of this year and forecast just one further 25-basis-point rate reduction in the second half of 2026. However, with inflation set to subsequently cool, we see scope for further monetary easing in 2027.

We see fears of an interest rate hike by the BOE as overdone, given the tendency for central banks to “look-through” energy shocks. A presently weak labor market further mitigates the risk of rate increases, in our view.

Interest rate hikes are worth monitoring for government bond investors, who could face higher yields and falling bond prices if the Bank of England raises rates in response to the energy price shock. However, we think this is unlikely.

The unemployment rate in the United Kingdom has been on an upward trend, hitting a five-year high of 5.2% this past December. We expect unemployment to remain above its long-term trend of about 4.5% in 2026, likely peaking at 6.1% in the fourth quarter.

Wage inflation also slowed toward the end of 2025.

The annual growth in private sector regular pay grew 3.5% in December, a full percentage point down from what was recorded in June. Regular pay growth also slowed for the broad economy in December to 3.9%, down from 4.1% in November.

A Morningstar survey showed that in the long run, client responses to market news may depend more on advisor support than on economic signals. Use client meetings to help investors look beyond the immediate impact of inflation to understand historical patterns, long-term trends, and your approach to risk mitigation.

The full UK Economic Outlook report covers:

• Forecasts for labor market conditions
• Headwinds facing consumer consumption
• Trends in investment expenditure and gross fixed capital formation