Q1 UK economic outlook: a sobering start with silver linings

Following a robust 2025, UK growth is set to slow this year amid ongoing geopolitical uncertainty and domestic challenges. However, lower inflation and the prospect of interest rate cuts should help lift growth in 2027.

Despite some significant headwinds, the UK saw decent growth of +1.4% in 2025. But while growth exceeded expectations in the first half of the year, the economy stuttered in the second half: Having shown no growth in the three months to October, GDP grew +0.3% in November. In December, total retail sales increased by just 1.2% year on year, against growth of 3.2% in December 2024, according to the British Retail Consortium, while UK construction output shrank for the 12th month in a row, according to the UK CPM Index.

After a difficult 2025, the UK economy is likely to remain weak in 2026. Demand is subdued, and businesses must contend with elevated costs and continuing geopolitical uncertainty, including the threat of additional US tariffs over Greenland. We expect UK growth to slow to +1.0% in 2026, with a moderate improvement in 2027 (+1.2%), supported by lower interest rates.

On the upside, fiscal policy has become more predictable following the Chancellor’s Autumn Budget, with no major legislative changes tabled for 2026. Public infrastructure investment remains solid while (albeit weak) consumer spending continues to strengthen, boosted by wage increases and lower inflation: We expect UK consumer spending to increase in 2026 +1.1%, up from +0.9% in 2025 and -0.2% in 2024.

This year should also see UK inflation normalise as lower growth and a softening labour market help to moderate lingering inflationary pressures. We expect UK inflation to slip below 3% by early 2026 and approach the Bank of England target of 2% by year end. A cooling economy and easing inflation should enable the Bank to continue cutting rates through 2026, albeit cautiously. We expect a 25bps cut in April, followed by another one in September, taking the bank rate to 3.25%. A further cut is likely in 2027.

In comparison, the global economy has proved surprisingly resilient: Following robust global GDP growth of +3% in 2025 we now expect +2.9% growth in 2026 and +2.8% in 2027. This +0.4pp upward revision in our forecast is largely driven by the US, as well as China, where growth has exceeded expectations. The Eurozone is expected to see moderate GDP growth this year (+1.1% in 2026 after +1.4% in 2025), with Germany on course to rebound after three consecutive years of stagnation or recession.

Global trade has also surprised on the upside, despite a transformative year for global supply chains. We recently revised upward our forecast for global trade growth from +2% to +3.5% in 2025 and from +0.6% to +1.3% in 2026, driven by lower tariffs and supply chain rerouting and mitigation strategies, as well as a surge in AI-related investments. At the start of 2026, global trade remains resilient, although an expected slowdown of Asian exports and the negative impact of higher tariffs will ultimately slow growth.

While global growth is exceeding previous expectations, downside risks remain. Potential geopolitical risks lurk, such as a breakdown in the US-China trade truce or an escalation in tensions with Russia over Ukraine, while Federal Reserve leadership changes and mid-term election raise the specter of US institutional uncertainty. Financial risks, such as the possibility of an AI-equity correction or a potential debt shock are likely to continue to increase throughout 2026.

At a global level, corporate balance sheets are stretched but still solid. Despite a challenging environment, many global companies are entering 2026 with strong earnings momentum and expanding margins. U.S. corporate earnings are expected to rise by double digits in 2026, while those in Europe are set to rebound and grow +12%. However, sector divergences are widening. Technology remains the standout winner, powered by growth in digital demand and an AI boom. In contrast, Europe’s automotive sector continues to face challenges, squeezed by the costly electric transition and intense competition from Chinese electric-vehicle rivals.

Despite robust fundamentals, geopolitical fragmentation and credit default risks still cloud the outlook. Insolvencies are expected to increase again this year: We are forecasting a +3% increase globally this year, following a +6% rise in 2025. Business insolvencies at the end of 2025 are likely to be rising or stable in two-thirds of countries, with three out of four countries exceeding 2016-2019 levels.

While global insolvencies are set to rise for the fifth consecutive year in 2026, they have begun to stabilise in the UK. However, with margins and cash flow under continued pressure, UK insolvencies are expected to remain at elevated levels well into 2027.