For the data behind the commentary, download the full January 2026 UK Economy & Housing Report.
AN OPTIMISTIC NOTE?
With the outlook for growth muted, there have been a number of recent economic stories that have surprised on the upside against consensus views.
Firstly, GDP for November saw a rebound to 0.3% after a fall of -0.1% in October, and a 0.1% increase in September (having been revised upwards from a contraction of -0.1%). This means we are likely to end 2025, with an annual growth rate of 1.4%.
Since then, after a positive PMI of 5.14 in December, the Flash PMI for January saw a sharp increase to 53.9. This was driven by an uptick in business optimism and strong order numbers, with the Services PMI as high as 54.3; Manufacturing was still positive at 51.6 but more muted in comparison. While the Flash PMI could well be revised, the reading suggests an element of post-Budget positivity across the business environment.
The other unexpected news was December’s increase in retail sales volumes, which saw growth of 0.4% month on month. However, this did not stop another disappointing ‘golden quarter’ for the retail sector, with the ‘golden quarter’ now seeing seven successive decreases in a row, as a result of lower pay growth and still low consumer confidence.
Despite these positive signs, with the labour market still showing signs of weakness, we still expect that the GDP growth will be muted during the course of 2026, which should underpin further interest rate cuts. On which….
TOO SOON TO CUT
CPI unexpectedly increased to 3.4% in December, up from 3.2% in November. Nevertheless, we still expect inflation to come down during the year, with interest rate cuts to come. However, it is likely that the MPC will think the February meeting is too early for cutting yet, with more evidence required of disinflation and pay remaining stable. In which case, the next interest rate cut may come at the April meeting.
