- Despite resilient economic activity at the start of the year, UK growth in 2026 is expected to ease compared with 2025 due to uncertainties surrounding the Middle East conflict and a softening labour market.
- UK headline inflation softened in recent months, to 2.8% in May, supported by a cut in the government’s cap on energy bills announced just before the conflict. The price of motor fuels continued to increase throughout the second quarter. Inflation is expected to rise over the second half of this year as the spike in oil and gas prices will raise the energy price cap for the quarter ahead.
- The Bank of England held interest rates in June as it continues to assess the inflationary impact from the disruption to global energy production against a weakening in business activity. Markets expect the bank to raise interest rates by the end of this year.
- Uncertainty about the external environment continues to weigh on sentiment. The latest Deloitte CFO survey for the first quarter of 2026 shows that geopolitics remains the top external risk for businesses, with finance leaders choosing to prioritise defensive strategies such as cost reduction. Capex, discretionary spending and hiring are expected to fall over the next 12 months. Other timely economic indicators suggest consumers also remain cautious.
- The latest Spring Forecast saw headroom rise further to nearly £24bn due to greater than expected tax receipts, although the ongoing Middle East conflict has increased uncertainty around these projections.
- Policy announcements made in the Autumn Budget last year mean that both taxation and public spending as a share of GDP are expected to reach some of the highest levels not seen outside recessions or wartime. Government debt is also expected to remain at a high level throughout the parliament.
- UK prime minister Keir Starmer announced his resignation in late June. It is widely expected that Andy Burnham, the former mayor of Greater Manchester, will replace Mr Starmer.
- Timing: the government’s next fiscal update is expected to take place in October.
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