Five ways the UK economy could positively surprise us in 2026 in World Economy News 20/01/2026 The UK grew faster than expected in November, which begs the question: are we being too gloomy about the year ahead? Our view – shared by most UK economists – is that 2026 is going to see the economy grow more slowly than in 2025. We expect 0.9% growth this year, below the 1.4% projected for 2025. That’s slightly below consensus. So how could we be pleasantly surprised? Lower interest rates One of our main calls for 2026 is that the UK will no longer look like an outlier on inflation. Food inflation, which is highest in Western Europe, should come down. Services inflation will come dramatically lower from April. Lower energy prices help, too. Headline CPI should fall from 3.2% in November to 2% from April onwards – and could perhaps dip below. If that sounds good for consumers, then remember that wage growth is also falling rapidly. Unemployment is rising, too, so when you net that all off, real disposable incomes are unlikely to grow in 2026. More importantly, the Bank of England is highly reticent to cut rates much further from here. We expect two more cuts in March and June, leaving Bank Rate at 3.25%. Markets are even more cautious than that. But the committee is incredibly divided, which means it only takes one official to change their view in order to drastically change the path of interest rates. As it becomes more evident that last year’s food price spike hasn’t yielded a more persistent bout of inflation, could we see one or two of the hawks drop their opposition to cuts? We wouldn’t rule out rates going below 3%. Crucially, corporate and household balance sheets are healthy enough to support more borrowing – a crucial difference to the post-financial crisis period. Household debt as a share of income is considerably lower than during the financial crisis, having fallen from 134% to 116% since 2022 alone. Credit to non-financial corporates was 59% of GDP as of Q3 last year, down from 70% in 2019. We are already seeing signs that rate cuts are boosting bank lending. Corporate loan growth is in excess of 5%; the BoE’s Credit Conditions Survey hints that demand for lending associated with investment has picked up. Consumer credit card lending is increasing noticeably as well. So yes, a more pronounced rate-cutting cycle is an upside risk for UK growth – with three major caveats. Firstly, it relies on faster rate cuts happening for good reasons – lower inflation – and not bad – a spike in unemployment. Secondly, rate cuts take a long time to benefit existing homeowners – a key channel of monetary policy. Over 90% of outstanding mortgages are on fixed interest rates, the majority of which are fixed initially for 5 years. The impact of past rate hikes is still coming through; the average interest rate on outstanding mortgages has continued to rise even as Bank Rate has been cut. And it is unlikely to fall through this year. Late 2020/early 2021 was a bumper period for mortgage approvals, so five years on, we are likely to see refinancing spike. Much of that will be at significantly higher rates. It helps explain why new homebuilding volumes are still down 21% from their 2022 high. The construction PMI fell off a cliff at the end of last year. Estate agents, via the RICS survey, aren’t reporting a pick-up in sales relative to the number of unsold properties on the market. We doubt this changes much in the near-term, even if the Bank of Engla