Four Reasons to Be Cheerful for UK PLC in 2026: Economics Viewpoint
Fiscal headroom under chancellor Reeves has widened, with 2026 expected to be a quieter economic year. The upcoming spring statement is likely to be a non-event, as the Office for Budget Responsibility (OBR) forecast will not be used to assess fiscal rules. Reeves intends to hold firm on fiscal policy until the autumn budget.
December's flash Purchasing Managers' Index (PMI) rose to 52.1 from 51.2, indicating the strongest private-sector new-business growth in 14 months, supported by improving service demand. However, GDP had contracted in October, reflecting mixed signals in activity.
Consumption has been supported by multiple factors, including a Bank of England interest rate cut, a £150 per year energy-relief package, and the end of months of tax speculation. Despite a savings rate of 10.7% in the second quarter of 2025 suggesting some capacity for spending, the high savings rate may also act to cap overall consumption. The Bank of England is unlikely to implement many further interest rate cuts.
Productivity saw a 1% rise in the first half of 2025, with potential gains driven by AI and technology. UK firms have historically underinvested in technology, and future progress depends on successfully reabsorbing displaced workers and making investments facilitated by lower borrowing costs.
