For the data behind the commentary, download the full October 2026 UK Economy & Housing Report.
THE WEEKS AHEAD
The good news story of the month is that the economy is still proving resilient. GDP grew 0.1% in August, leaving output 2.1% higher than a year earlier, the strongest annual rate since August 2022. There is now additional evidence that AI and technology is driving this growth: five professional and digital industries, led by computer programming and consultancy, contributed more than half of the 1.8% annual growth in the three months to August. These are the first signs of the productivity gains that could deliver the growth the government has promised.
Unfortunately, this is not where the economic discourse is, or will be, over the next fortnight. On 28th October, John Healey delivers his first Budget as Chancellor, the first of the Burnham government. Public sector debt has passed £3 trillion, around 94% of GDP, September borrowing of £24.5bn came in above forecast, and debt interest of £10.9bn was the highest September on record. Estimates of the headroom against the fiscal rules vary but are expected to be in the region of £15 billion.
The pre-Budget briefing points to ‘breathing space’ rather than a big bang. Rises in income tax, employee National Insurance and VAT have been ruled out, as has a rise in capital gains tax, helpful for investor sentiment and deal flow. A further increase in warehouse rates has also been ruled out for now. The main revenue raiser looks set to be a bank surcharge. For real estate, what matters most is credibility. After an October in which bonds moved out significantly – the 10-year reached 5.48%, its highest since 2007 and 113 basis points above the start of the war in Iran while the 30-year broke 6% for the first time since 1998 – yields have since eased at the long end as the Bank paused sales, and the travails in France caught bond investors’ attention.
Whatever the Chancellor announces, a rate rise is now close to fully priced. September CPI rose to 3.5%, above consensus, and core (2.8%) and services (3.7%) inflation both moved up. The majority of economists now expect a base rate increase this year.
Two days before the MPC meets, the US mid-terms add an additional layer of event risk. Prediction markets give the Democrats around a 93% chance of taking the House and close to 70% for a clean sweep. While there are a number of scenarios to play out, our expectation is that the results will impact bond markets further.
In the short and medium term, for now, the question still falls to the price of bonds.
