GDP growth is projected to strengthen to 1.7% in 2025, boosted by the large increase in public expenditure set out in the autumn budget, before slowing to 1.3% in 2026, as the effect of fiscal expansion tapers off. Wage-driven pressures on the price of services and the fiscal stimulus will keep underlying price pressures elevated, leaving headline inflation above target over 2025-26. Large government deficits, expected at 4.5% of GDP in 2025 and 3.9% in 2026, will hold public debt above 100% of GDP and rising.

Fiscal policy should be prudent, and buffers rebuilt, as the currently restrictive monetary stance eases gradually. Ensuring that the new fiscal rules are effective in preserving fiscal sustainability and supporting productivity-enhancing public investment is key. Continuing structural reforms is essential to boost labour supply, support female participation, including through the ongoing extension of childcare support, and address skills mismatch, including through the overhaul of the apprenticeship system.

Flash estimates indicate that GDP growth slowed to 0.1% in the third quarter after a strong first half of 2024. But momentum is positive nevertheless, with retail sales on an upward trend since early 2024. Credit to the private sector has been growing since January, after 11 consecutive months of contraction, and Bank Rate has been cut twice by 25 basis points since August. Ten-year gilt yields stood below 4% in August and September, about 50 basis points lower than a year earlier, before rising above 4¼ per cent from late October. Monthly mortgage approvals for house purchase have almost returned to pre-pandemic levels, and fixed-term mortgage rates have dropped significantly. House prices have risen further since the summer and construction demand appears robust, supporting business sentiment overall despite some weakening in services.

CPI inflation dropped to 1.7% in September, but the 10% increase in the Ofgem energy price cap in October pushed the headline rate back to 2.3%. Domestic price pressures remain, with elevated annual wage growth of 4.8% for regular pay in the private sector in the three months to September maintaining strong services price inflation, at 5% in October. Pockets of skills shortages remain, such as engineers and finance professionals, although overall vacancies are back to pre-pandemic levels. The appreciation of sterling in the year to September, and normalised global energy prices put downward pressure on imported inflation, though this been partially offset by the recent appreciation of the US dollar.

Monetary policy is assumed to continue easing until early 2026, with Bank Rate gradually coming down to 3.5% from its current level of 4.75%, as inflation continues converging towards target. The Bank of England is also assumed to continue unwinding the stock of assets held for monetary purposes in the Asset Purchase Facility at an unchanged pace, with the GBP 100 billion target for gilt stock reduction over the 12-month period to September 2025 renewed for another year.

Fiscal policy will be tightening over 2024-26, though by less than expected with significant fiscal loosening in the tax, spending, and borrowing package announced at the autumn budget. Both current expenditure and public investment are set to increase. About half of the increase is funded from higher taxes, the largest of which is a rise in the rate of employer social security contributions, while the other half is funded through extra borrowing. New fiscal rules make supplementary room for public investment: the debt measure used as a target now includes financial assets, thereby enabling extra borrowing, while the requirement to balance current budget ensures that borrowing finances investment. As the government complies with the rules, tax receipts will keep rising to historic highs of more than 38% of GDP over the next two years.

Output is projected to expand by 1.7% in 2025 and 1.3% in 2026. Government consumption and investment will boost growth in 2025, owing to front-loaded fiscal loosening, before the increase in taxes starts weighing on private consumption and additional government borrowing needs crowd out business investment. Excess household savings, population growth, and monetary easing should drive strong residential investment, while the contribution of trade to growth is expected to strengthen, as global economic conditions continue to improve. Unemployment is projected to decline to 4.0% in 2026, as public spending supports labour demand, and firms hold on to staff on the back of subdued labour force participation and skills shortages, despite the rise in employer social security contributions. Headline inflation will remain above target throughout 2025-26, as services inflation remains sticky and the boost in demand from the spending package brings the economy above potential. The budget deficit is expected at 4.5% of GDP in 2025 and 3.9% in 2026, while public debt will remain above 100% of GDP over 2025‑26.

With limited fiscal buffers, possible external shocks that would require fiscal support are a significant downside risk to the outlook. These include increases in global energy prices, given UK households reliance on natural gas. Moreover, persistent price pressures on the back of the strong increase in government expenditure and uncertainty about the degree of slack in the labour market could require the monetary stance to remain tighter for longer. A smaller-than-expected crowding out of private investment constitutes an upside risk.

Rebuilding fiscal buffers and continuing to mobilise additional revenue, including by closing loopholes and reducing distortions in the tax system, is necessary to ensure fiscal sustainability. Ensuring that borrowing under the new fiscal rules finances productivity-enhancing public investment, as planned, would improve growth potential over the long run. Reversing the ongoing decline in labour market participation is key, in part by reforming the Work Capability Assessment, so that income support is not conditioned on being found incapacitated for work. Delivering the ongoing extension of childcare support for working parents, including by prioritising lower-income households if childcare supply falls short of demand, is required to promote female participation. Reducing subsidy rates for current employees under the Apprenticeship Levy scheme, and channelling support to young people would support school-to-work transitions and alleviate shortages of technical and vocational skills.