Near-term pain, better times ahead

The ongoing energy price shock is a further temporary setback to the UK economy rather than a permanent blow. If we’re right that over the next year the economy and labour market won’t be strong enough to turn the energy-induced rise in CPI inflation to above 4.0% into a long period of high domestic inflation, then CPI inflation may fall back to 2.0% in late 2027, interest rate cuts may come back on to the agenda in late 2027 and GDP growth could rise from 1.0% in 2027 to 1.5% in 2028.

In this UK Economic Outlook, we explain why we think investors are too pessimistic about interest rates, and how far our forecasts for 2027 and 2028 sit below what markets are pricing. We also set out why this burst of inflation is unlikely to trigger the second-round effects seen in 2022, where we think unemployment is heading, and what the Budget on 28th October is likely to mean for the public finances. It also covers the early signs that AI may be lifting UK productivity sooner than expected. All of this is backed by eight charts and our full set of forecasts, which you can download.