Oxford Economics expects 2026 to be another difficult year for the UK economy, forecasting GDP growth of around 1%, the lowest prediction in the consensus.
The firm argues that the headline strength shown in 2025 masks deeper structural weaknesses, with no clear driver of sustainable growth emerging and fiscal concerns likely to intensify.
The report highlights four themes shaping the outlook. First, it warns that fiscal and political risks will remain elevated.
Although initial market reaction to the November Budget was positive, Oxford Economics said the package lacked a coherent strategy and relied heavily on future measures unlikely to deliver consolidation.
The organisation expects investors to scrutinise the Government’s plans more closely, noting the UK’s poor debt dynamics and suggesting that a gradual erosion of confidence could steepen the yield curve and weaken sterling.
It added that political instability within the governing Labour party may add to fiscal uncertainty.
Second, it argues that the UK lacks a sustainable growth engine. Government spending has been the main contributor to GDP expansion in recent years and is expected to continue supporting activity into 2026.
Private sector demand remains subdued, with households facing weaker real income growth and businesses constrained by low profitability and poor confidence.
Consumer spending is expected to grow by only around 1%, while business investment is forecast to remain broadly flat.
The outlook for exports is weak due to higher energy prices, limited competitiveness and downbeat prospects in key markets.
A third theme concerns inflation and monetary policy. Oxford Economics expects CPI inflation to cool gradually next year, helped by lower contributions from food and energy, but to remain well above the 2% target throughout 2026.
Services inflation is expected to ease only slowly, and a weaker pound could create new price pressures.
The report says these conditions will continue to divide the Monetary Policy Committee, limiting the scope for decisive moves. It forecasts Bank Rate will fall to around 3.25% by the end of 2026, with cuts implemented cautiously.
The final theme focuses on the labour market, where conditions are expected to weaken further. Public sector hiring has so far offset declining private sector employment, but Oxford Economics expects this support to fade as Government spending growth slows.
Private sector job creation is forecast to remain subdued, leading to unemployment averaging just above 5% next year.
The report notes significant uncertainties, including unsettled labour market data, higher inactivity levels and the potential impact of changes to immigration rules.
