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UK in Focus: Essential economic news for businesses
UK household and business sentiment ticked higher but not enough to change the fortunes of weak economic data for 2025. Meanwhile, slower inflation and an interest rate cut should support a further improvement in activity to start the new year but the 2026 outlook is fragile, with risks aplenty.
An 'it could have been worse' sentiment lift
The UK spent much of the second half of 2025 worrying about possible tax rises in the Budget. Now, with worst-case scenarios largely avoided, and the Autumn Budget in the rear-view mirror, hopes turn to an improvement in sentiment and a pickup in economic growth. Early indicators for December showed a mildly more positive environment, consumer confidence rose to -17, up two points from November, but wasn’t enough to break out of its recent tight range. Similarly, the 0.6pt rise in the PMI business confidence in future trading expectations was modest given the degree of Budget related uncertainty.
More broadly, the economy has deteriorated: GDP growth was a meagre 0.1% q-o-q in Q3, real disposable income fell 0.8% q-o-q, the rate of unemployment rose to 5.1% in three months to October, and retail sales fell 0.1% m-o-m in November, suggesting a quieter-than-usual Black Friday. So, the small lift in sentiment in December is unlikely to translate into significantly better official data for that month or Q4 and reflects more of an ‘it could have been worse’ boost to sentiment.
Out with 2025, in with a new year
We remain relatively optimistic that Q1 2026 will prove better than the prior quarter. Indeed, there was some positivity that could provide a sound platform: UK inflation rate fell to 3.2% and the Chancellor’s Budget announcements should help see some sub-2% inflation rates in the middle of 2026. That improved inflation outlook coupled with the soft backdrop described above, helped see UK Bank Rate be cut to 3.75% at the BoE’s December policy meeting. In our view, interest rates will gradually fall further in 2026 which should enable a pickup in consumer spending and some more investment.
That said, our central case for 2026 is a fragile one, households remain cautious, real disposable income growth is meagre, and labour markets are soft. Unemployment could rise further amid subdued demand and further headwinds for businesses including labour costs and higher taxes. And although wage growth is slowing, a further above-inflation rise in the NLW in April combined with pockets of recruitment challenges risk the UK’s stagflationary environment persisting leading to a more uncertain interest rate outlook. We also need no more policy instability and yet one of the biggest risks to the outlook is political, namely the risk of a leadership challenge.
UK in Focus January PDF
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s)is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks.
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