Oxford Economics (OE) has slightly raised has slightly raised its 2026 and 2027 growth forecasts to 1% and 1.4% due to short-term fiscal loosening measures announced. Q3 UK GDP grew just 0.1%, likely held back by a Jaguar Land Rover cyber-attack and the persistence of residual seasonality in the GDP data itself. OE still expects that by the end of 2026, the bank rate will be 3.25%, from 3.75% currently.
Worst-case trade war
US trade tensions drag global growth. Rising tariffs and stalled USMCA renegotiation disrupt supply chains, depress investment, and weaken demand as the US economy contracts throughout 2026.
Tighter fiscal policy
Fiscal tightening hits global momentum. Rising debt fears push bond yields up and stocks down, prompting governments to rein in spending, with front-loaded austerity in the US amplifying the drag on growth.
AI boom
AI-driven investment surge lifts global growth. Booming US tech spending and stock markets, powered by rapid AI adoption and productivity gains, mirroring the upswing witnessed in the 1990s.
Tech downturn
Tech-led downturn drags on global growth. A sharp fall in US tech stocks and investment halts US growth in 2026, with weaker sentiment spilling over internationally and weighing on the UK via confidence and currency effects.
Key drivers of the short-term outlook
- Fiscal tightening. Tax rises will lift revenue from 38.9% to 41.6% of GDP by 2028-2029, while spending grows only marginally, keeping overall policy contractionary.
- Consumers spending more. Household caution eases as sentiment improves, supporting around 1% annual spending growth in 2026–2027.
- Monetary policy. educed the Bank Rate to 3.75% in December, as inflation fell by more than expected. More cuts expected throughout 2026.
- April NICs rise. Firms curb hiring and limit pay rises to control labour costs, with unemployment at 5.1% and some price increases passed to consumers.
What to watch out for
- Elevated fiscal risk. While initial market reaction to November’s Budget was favourable, OE expects questions around the planned fiscal consolidation.
- Planning reforms. Government aims to boost growth via easier housebuilding, but past reforms suggest results will take time.
- Challenging political backdrop. Labour’s unpopular leadership and potential shift left could undermine market confidence.
- Immigration reforms. Tighter immigration rules may slow growth and create skills shortages.
Produced by the Foresight Factory for the IPA Commercial Group
