Oxford Economics warns of weak 2026 GDP growth, sticky inflation and only modest interest rate cuts
The UK economy is expected to grow by only about 1% in 2026, leaving it close to the bottom of the G7 growth table and adding pressure on borrowers already dealing with high debt costs, according to Oxford Economics.
The global economic research firm also flagged mounting fiscal and political risks, stubbornly above‑target inflation that will limit Bank of England rate cuts, and a labour market that is likely to see unemployment edge above 5% – a combination that could weigh on mortgage affordability and arrears.
In a new research briefing, Andrew Goodwin (pictured right), chief UK economist at Oxford Economics, set out a bleak baseline that places the firm at the pessimistic end of consensus forecasts. “We think 2026 will be another challenging year for the UK economy – our GDP growth forecast of 1% is at the bottom of the consensus,” he said.
Fiscal stance and political uncertainty heighten risk
According to Oxford Economics, the Autumn Budget has not convinced markets that the UK’s public finances are on a sustainable footing. The consolidation plan is heavily back‑loaded into 2029–30, leans strongly on tax increases and assumed “efficiency savings”, and relies on growth projections from the Office for Budget Responsibility that sit near the top of the forecasters’ range.
The firm noted that the UK’s debt dynamics are particularly troubling: average nominal GDP growth is projected to run below the effective interest rate on government borrowing over the next five years, a profile among advanced economies matched only by Italy. That gap makes it harder to stabilise or reduce the debt ratio without further tightening.
These economic concerns sit alongside a difficult political backdrop. The Labour government is well behind in opinion polls, and both the prime minister and the chancellor have low personal approval ratings. While a change of government is seen as unlikely in the near term given Labour’s large majority, leadership turmoil is viewed as a realistic prospect, which could unsettle investors.
Oxford Economics expects a gradual steepening of the gilt yield curve and a weaker pound as its central scenario. However, it warns that a sharper loss of confidence in the fiscal framework – particularly if leadership changes shift policy to the left – could trigger a more abrupt adjustment and a deeper downturn than in its baseline.
“The UK lacks a sustainable growth driver,” Goodwin said. “Government spending has played an outsized role in GDP growth in recent years and will do so again in 2026.”
Limited rate relief as inflation stays above target
For mortgage lenders and intermediaries, the path of inflation and interest rates is central. Oxford Economics pointed out that inflation reached 3.8% in September 2025 and, although it has begun to fall, is expected to remain above the Bank of England’s 2% target throughout 2026.
The consultancy expects the MPC to remain divided between members worried about entrenched inflation and those more focused on downside risks to growth. Under its baseline, the committee is forecast to begin easing either in December or February and to implement three 25‑basis‑point cuts next year. If inflation proves firmer than expected or the pound weakens sharply because of fiscal doubts, the firm warned that rate cuts could be delayed.
“Inflation should cool next year due to lower contributions from food and energy, plus slowing services inflation,” Goodwin said. “But it will likely remain well above target.
“Alongside weak growth, this will stop the MPC from shifting decisively in one direction or the other. On balance, we expect Bank Rate to be cut to 3.25% by the end of 2026.”
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