Slow growth and political alarms: 3 calls for the UK economy

We expect inflation to fall from 3.6% now to almost 2% in April. Food inflation has likely peaked. The marked fall in wage growth points to lower services inflation, helped by more contained regulatory price hikes and slower rental growth. The government’s decision to lower energy bills should trim 0.3pp off headline CPI too.

Hawks at the Bank of England fear that elevated inflation rates in 2025 – particularly for food – will fuel a more sustained episode of price pressure akin to 2022. We disagree. The jobs market is considerably weaker. Firms’ pricing power has receded. Though a risky call after several years of sticky inflation, we think 2026 will finally show the UK as less of an outlier. The Bank is set to narrowly vote on a December rate cut. And as the tide turns on inflation, we expect two more next year – and the risk is we get more.

Twelve months ago, our bold call correctly argued that more tax rises were inevitable in 2025. The same isn’t necessarily true in 2026. Adverse economic forecasts are less likely to force the chancellor’s hand, given greater ‘headroom’ under the fiscal rules. The fact that issuance and the deficit will be falling next year is a reminder that the UK isn’t the “next France”.

Yet the Autumn Budget failed to address many longer-term challenges. Public spending pressures are growing. Taxes on average workers are comparably low. That, against a backdrop of mounting political pressure, means a change of political leadership can’t be ruled out. May’s local elections are a key flashpoint.

Changing leaders isn’t easy; 20% of Labour MPs would need to back a rival candidate when none currently exists. But were it to happen – or even if the risk of it rises – bond yields would likely spike on the perception that a more left-leaning PM would hike borrowing. This would be against a backdrop of growing populism on the political right.

Politics is the biggest risk for UK bond markets in 2026.