Investing.com — The UK economy is set to gain momentum in 2026 after experiencing sluggish growth in the second half of 2025, according to a new report from UBS on Thursday.
Following GDP growth of 0.1% quarter-on-quarter in both Q3 and Q4 of 2025, UBS forecasts growth to accelerate to 0.3% in Q1-26 and 0.4% in Q2-26. The bank expects the UK economy to grow by 1.1% overall in 2026, before rising to 1.4% in 2027.
The slowdown in the latter half of 2025 was partly attributed to Budget-related uncertainty, which UBS believes is now unwinding. Despite this positive outlook, the bank warns that the UK economy still faces headwinds from a challenging global trade environment and domestic political issues.
Inflation, which fell to 3.0% year-on-year in January, is expected to remain at this level in February before dropping significantly to 2% in April. This decline will be driven by cuts in household energy bills and the fading impact of previous administrative price increases. UBS forecasts inflation to average 2% in 2026, down from 3.4% in 2025.
The Bank of England is expected to cut interest rates further in response to easing inflation pressures. UBS anticipates a 25 basis point cut in March, lowering the Bank Rate to 3.5%, followed by another cut in June to 3.25%. The bank sees risks to this forecast as “skewed to the downside,” suggesting rates could potentially fall below 3.25%.
On the fiscal front, the UK government’s Spring Fiscal Statement on March 3 is unlikely to bring major policy changes, according to UBS. While the fiscal headroom is expected to be lower than the £22 billion estimated in November, it should remain “sufficiently large to avoid major policy announcements.”
Political uncertainty remains a concern, with UBS noting that a Labour leadership challenge is still possible despite Prime Minister Starmer recently securing backing from Labour MPs. The bank warns that any leadership change could impact the UK’s fiscal outlook, particularly if it leads to a new Chancellor who might ease fiscal rules.