UK Economy Briefing: July 2026

The economy

Following estimated growth of 0.6% in the first quarter of the year, the latest indicators point to output growth of around 0.2% in 2026 Q2. This is similar to the pattern of growth in the first half of 2025, when quarterly growth also slowed from 0.6% in Q1 to 0.2% in Q2, and leaves four-quarter growth unchanged at around 1%.

Real GDP growth is estimated to have been 1.3% in 2025. This is slightly lower than reported previously but up from 1% in 2024, and 0.5 percentage points higher than forecast at the beginning of the year. Having contracted in 2023 and 2024, real household spending is estimated to have increased by close to 1% in 2025. Real government consumption increased by 1.75% in 2025 and real investment spending rose by 4%. Since 2020, real GDP growth has averaged around 1% a year – below the 2% a year averaged between 2010 and 2019, but in line with the euro area average.

Household spending is doing more of the work than the headline numbers suggest. As higher taxes were more than offset by a lower household saving ratio, real household spending increased by 0.6% in 2026 Q1. This was larger than the cumulative quarterly increase during the whole of 2025, and resulted in four-quarter growth rising from 0.5% in 2025 Q4 to close to 1% in 2026 Q1.

Having been close to 10% in 2024 and 2025, the household saving ratio is estimated to have fallen to around 9% in 2026 Q1. As the saving ratio continues to drift lower, and real household disposable income increases at a steady rate, our estimates show real household spending increasing by 1.25% in 2026 and 1.75% in 2027. On our estimates, this results in higher rates of overall economic growth than envisaged in current consensus forecasts.

Inflation and interest rates

As higher fuel prices were more than offset by comparisons to a year-earlier base and a 7% reduction in the energy price cap, consumer price inflation fell from 3.3% to 2.8% between March and April and remained at 2.8% in May. This was 0.4 percentage points lower than the MPC's April forecast and 0.6 percentage points lower than a year earlier. Core CPI inflation rose slightly in May, to 2.6%, but was 0.9 percentage points lower than a year earlier.

The energy shock that dominated the spring has largely unwound. Higher energy prices following the outbreak of hostilities in the Middle East resulted in market interest rate expectations for the end of 2026 increasing from 3.25% to 4.5%. Reflecting this, quoted mortgage interest rates rose from 4.25% to 5.25% and mortgage approvals for house purchase fell from 66,000 to 56,000 between April and May. Housing transactions were steady at around 100,000 a month over January to May but are likely to slip to 90,000–95,000 a month over the summer.

As oil prices returned to pre-conflict levels, market interest rate expectations fell back, to slightly less than 4%, though they remain above previous levels. With oil prices back in this range (though rising in recent days), lower fuel prices will offset the larger part of the 13% increase in the energy price cap in July.

If oil prices remain in a range of $70–80 a barrel, then after allowing for some increase in food price inflation, and assuming the energy price cap is broadly flat in October, our arithmetic shows inflation peaking at a little over 3% in September. This is well below the previous peak of 3.8% in September 2025. In 2026 as a whole, our arithmetic shows CPI inflation averaging around 3%, lower than the average of slightly less than 3.5% in 2025.

With private sector pay growth having slowed to 3%, and likely to remain around this level as the demand for labour remains soft, then as the impact of the increase in energy prices unwinds, inflation is, in our view, set to return to the 2% target in the first half of 2027 before falling below target in the second half of the year. As inflation returns to target sooner than envisaged in the MPC's April projections, and private sector wage growth remains around 3%, policy interest rates can, in our view, be expected to resume a downward path during 2027. Over time, easing inflation and interest rate pressures will, in our view, boost consumption growth.

The public finances

Higher taxes resulted in the budget deficit falling to 4.25% of GDP in 2025–26. Excluding investment spending, the current budget deficit was 1.5% of GDP in 2025–26. As tax allowances remain frozen and spending growth slows, our estimates show the budget deficit falling to 3.5% of GDP in the current financial year and to less than 3% of GDP in 2027–28.

On our projections, the current budget surplus is £30–35 billion in 2029–30. This is £5–10 billion larger than the projections in Spring Statement 2026.

In summary

The energy shock pushed market interest rate expectations, mortgage rates and consensus inflation forecasts higher in the spring, but with oil back at pre-conflict levels its effect is fading. On our arithmetic, inflation peaks at a little over 3% in September – well below last year's peak – averages around 3% in 2026, and falls below the 2% target in the second half of 2027. As inflation returns to target sooner than envisaged in the MPC's April projections, policy interest rates can, in our view, be expected to resume a downward path during 2027, and as the household saving ratio continues to drift lower, our estimates show growth running ahead of current consensus forecasts.