Economic Outlook: Factors Influencing the UK’s Economic Future

Looking ahead, we think some of the negativity around the United Kingdom’s medium-term economic performance is overdone.

A tighter fiscal policy stance is expected to come about from the autumn budget in late November. Modest tax hikes are likely, and we expect they’ll weigh on growth in 2026.

Importantly, we expect inflation will ease appreciably in 2026. We expect price growth will encroach upon the Bank of England’s 2% inflation by late 2026 as past price shocks fade and slack in the economy widens. In turn, this will provide the BOE with increased scope to normalize interest rates and offer support to the economy in 2026.

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

Fiscal tightening is underway in the United Kingdom, with growth in government expenditures on course to slow appreciably in 2026.

In March 2025, the Office for Budget Responsibility estimated the government possessed modest headroom of GBP 10 billion relative to a balanced current budget in 2029-30. However, this headroom has narrowed since as the government backtracked on cost-saving reforms to the welfare system. A likely downgrade to the OBR’s medium-term economic growth assumptions will further narrow said headroom.

Therefore, a modest rise in taxes is a likely feature in the upcoming autumn budget, which would have some damping effect on near-term economic activity. Still, we think the negativity around the specter of increasing tax receipts is overdone.&

Contractionary fiscal policy isn’t entirely unwelcome. The UK economy continues to fire near its potential, and financial conditions remain relatively tight. Further, we think it’s highly unlikely that tax increases in the upcoming budget will put significant pressure on aggregate demand.

Public debt levels are worth monitoring for government bond investors, who could face higher yields and falling bond prices if debt rises to unsustainable levels. 

The gilt market wants to see the government deliver against its promise of fiscal prudence. Here, adherence to the government’s self-imposed fiscal rules—consisting of a current budget surplus, and a falling debt/GDP ratio by fiscal-year 2029-30—is a key litmus test to which the bond market is paying close attention.

The UK economy remains on track to deliver growth of about 1.5% in 2025, with the trade war delivering a far less pronounced economic shock than originally feared.

A strong contribution from government expenditures is offsetting weak business investment and consumer spending in 2025. However, as the fiscal stance tightens in 2026, government spending and an expected income tax hike is set to weigh on economic growth.;

Nonetheless, we expect a subsequent pickup in growth from 2027 onward, with the Bank of England likely to finalize the normalization of interest rates by mid-2027.

During economic slowdowns, 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.

Inflation has reared its ugly head once more in 2025, ticking up significantly in the second quarter, owing to spikes in food, housing, and recreation and culture prices. In the third quarter of 2025, transport prices—including air fares, motor fuels, and vehicle maintenance—have upwardly pressured the broader rate of inflation, while the prior spikes in food prices began to unwind.

Annual headline CPI inflation—the rate closely monitored by the Bank of England—was 4.1% at its most recent reading in September 2025, unchanged relative to a month earlier. The UK’s presently elevated rate of price growth has left it an outlier relative to peer European economies, such as Germany and France, where inflation has slowed to more normalized levels.

However, we think inflation has now peaked.

Indeed, the disinflation process remains underway, with anchored long-term inflation expectations allowing for the impact of prior shocks to energy and other volatile consumer prices to fade progressively from late 2025 and into 2026. Consequently, we expect inflation to fully revert to the E’s 2% inflation target in early 2027. The emergence of a wider degree of economic slack in the coming year should also help slow price growth.

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 BOE will remain cautious in the latter half of this year—in light of the present uptick in inflation—and forecast just one further 25-basis-point rate reduction in 2025. However, with inflation set to subsequently cool, we see scope for meaningful monetary easing over the 2026-27 period. Beginning in 2026, we expect the BOE to deliver a total of five 25-basis-point rate cuts, lowering the bank rate to 2.5% by mid-2027.

Our medium-term outlook for the bank rate reflects the eventual retracement of inflation back toward the bank’s long-term 2% target, necessitating a normalization of interest rates in the UK economy. It is also conditioned on the assumption that the UK’s natural rate of interest remains in the range of 2%-3%.

By contrast, the money markets price in two to three further 25-basis-point cuts in this cycle. We think the market-implied path for the bank rate reflects expectations that economic growth will be a touch stronger than we forecast, leading inflation to prove somewhat more persistent. It may also reflect forecasters’ belief that the natural rate of interest in the UK has risen modestly in recent times.

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. 

Overall, near-term GDP growth forecasts for the United Kingdom lag those of other advanced and emerging economies. 

The International Monetary Fund expects euro area economic growth to average 1.2% over the next five years, roughly in line with its performance over the prior 20 years but trailing the average performance of its advanced economy peer group (1.6%) by some 40 basis points.

In the United States, GDP growth is trending down, averaging 2.0% year over year in the second half of 2025. Morningstar economists believe this is due to more-cautious consumers, the fading of temporary boosts such as the factory building boom, and the lingering effects of high interest rates. 

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