As the Chancellor prepares for the Autumn Budget, the UK economy finds itself caught between fading inflation and faltering momentum. The data have improved just enough to avoid recession headlines, yet not enough to signal a genuine recovery. Growth is flatlining, productivity remains weak, and the policy mix heading into 2026 will need to strike an almost impossible balance between credibility and support.

Growth: Flatlining Rather Than Recovering

Pantheon Macroeconomics’ October UK Chartbook effectively captures the paradox. Underlying GDP growth averaged around 1.6% annualised over the past nine months, but that strength reflects earlier momentum rather than a fresh upswing. Retail sales have been buoyant, but business surveys suggest that the economy has lost momentum since the summer. Pantheon now expects quarter-on-quarter growth of just 0.2% in Q3, and possibly 0.3% at best—numbers that barely beat stagnation.

Corporate credit demand is holding up, and real-income gains have bolstered consumer spending; however, this feels more like late-cycle endurance than expansion. Tax uncertainty, tariff disruption and the psychological drag of repeated fiscal tightening are capping sentiment. The result: an economy moving sideways, not up.

Inflation: Easing, but Stubbornly So

Inflation has genuinely improved. September’s data undershot expectations across categories, helped by easing food prices and an improving energy outlook. Pantheon now expects the headline CPI to fall to 2.4% by next July, assuming a 5% cut in household energy bills next spring. Yet the same forecast warns inflation will tick back up to 2.7% through late 2026, reflecting structural stickiness in services and wages.

The crucial story lies in services inflation, still running at around 4% annualised—roughly double the level compatible with the Bank of England’s 2% target. Pay settlements remain elevated, and even as headline wage growth falls from 4.8% to 4.4%, it remains too high. The “real living wage” is expected to rise by 6.7% in 2025, while the statutory minimum wage is projected to increase by around 4%. Strong labour retention suggests little spare capacity to dampen pay pressures further.

Put simply, inflation is moderating, not melting. The underlying drivers—wages, housing costs, and service-sector margins—are still aligned in the wrong direction.

The MPC’s Dilemma: To Cut, or Not to Cut?

Markets and forecasters alike are split on whether the Monetary Policy Committee (MPC) will cut rates again in 2025. Pantheon expects one final 25-basis-point reduction in December, bringing Bank Rate to 3.75%, but even they acknowledge it’s a tactical move rather than the start of a loosening cycle.

The data don’t make that decision easy. Growth is weak, but not collapsing. Inflation is lower, but it is not yet comfortably near the target. The labour market is loosening only gradually, and wage pressures—though easing—still imply services inflation north of 3.5%. Against that backdrop, Governor Andrew Bailey’s cautious tone suggests any December cut would be heavily data-dependent.

In truth, the Bank could just as easily hold. With fiscal tightening imminent and inflation expectations still “modestly de-anchored,” a premature move risks looking political. Even Pantheon concedes that the MPC will “likely respond to better near-term inflation data by easing policy, but will have to turn cautious once again after one or two cuts.” In other words, if a cut comes, it may be the last for a long while.

Fiscal Policy: The Disinflationary Budget

The upcoming budget is likely to have little impact on short-term growth. The Chancellor appears intent on doubling fiscal headroom to around £20 billion, implying £30–40 billion in tax rises or spending restraint. Energy-bill support may lower inflation temporarily, but broader measures—such as pension-relief limits, “sin tax” hikes, and frozen thresholds—will act as a brake on household demand.

Politically, this is about signalling credibility to markets. Gilt yields already discount a more stable fiscal trajectory, meaning the risk now runs in the other direction: disappointment. If the Budget feels overly austere or over-optimistic, yields could rise rather than fall for the Bank of England, which would reinforce the case for patience.

Labour Market: Stability at a Cost

The employment data remain superficially reassuring. Payrolls have stabilised, redundancies are low, and the jobless rate, near 4.8%, shows only a gentle drift. But stability masks fragility. The earlier fall in employment owed as much to payroll-tax changes as to demand weakness, and many sectors—such as retail, hospitality, and administration—are still adjusting to higher costs and reduced flexibility.

More importantly, wage growth at 4–5% isn’t consistent with 2% inflation. Without productivity gains or a decisive easing in labour demand, wage-price inertia will persist well into 2026. That makes a sustained rate-cutting cycle unlikely.

Outlook: Treading Water

The pre-Budget economy looks less like a recovery and more like an uneasy equilibrium. Headline data provide comfort that the UK has avoided a hard landing, but the cost has been stagnation. Flat GDP, sticky services inflation and limited fiscal space suggest that 2026 will start with the economy still “treading water”.

If there’s a silver lining, it lies in the absence of crisis. Real incomes are improving, credit conditions are easing, and business investment—though modest—is no longer falling. But this is stabilisation, not expansion.

Conclusion

The UK enters Budget week in a fragile state. Inflation has improved enough to avoid alarm, but not sufficiently to justify celebration. A December rate cut remains possible, but far from guaranteed; the Bank of England will want to see clear evidence that underlying price pressures are cooling.

Fiscal tightening, meanwhile, will temper any optimism. For now, the best description of Britain’s economic outlook is neither boom nor bust—it’s balance without momentum. The challenge for policymakers is to turn that fragile balance into something more enduring before the window closes.

Have a great week!