- 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 increased to 3.3% in March, driven by rising motor fuel prices. The conflict is the Middle East is expected to raise inflation over the remainer of this year due to a spike in oil and gas prices.
- The Bank of England held interest rates in late April as it continues to assess the inflationary impact from the disruption to global energy production against an expected 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 Autum 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.
- Timing: the government’s next fiscal update is expected to take place in October.
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