ECONOMIC OVERVIEW
Weak, but broadly stable
Key economic indicators were moving in the right direction at the beginning of the year. Consumer price inflation (CPI) was easing, and the Bank of England had cut the Bank Rate six times since August 2024 with further cuts expected in 2026. General affordability and the cost of living were improving, paving the way for improved economic confidence.
UK CPI fell to 3.0% in January and remained unchanged in February. This was in line with economists’ expectations and marked the lowest level since March 2025, despite staying above the 2.0% target. The Office for Budget Responsibility expected CPI to fall further to 1.9% in 2026, slightly lower than an average view from commentators.
The economy was weak but broadly stable, as Gross Domestic Product (GDP) growth fell slightly short of expectations in 2025, recording 1.4% growth, but appeared to avoid any significant impacts from the 2025 trade wars. Much of the UK’s economic growth was front-loaded into Q1 2025, as businesses and individuals brought spending plans forward ahead of enhanced US tariffs. In the following quarters, economic growth in the UK has been weak (FIGURE 1), with the majority of confidence being led by publicly backed spending.
Source: ONS
Wider signs of growing confidence
At the beginning of the year, monthly GDP growth outperformed expectations, reaching 0.5% in February compared with forecasts of 0.1%. This was driven by strong performance in services and manufacturing, and a recovery in construction output. In the three months to February, the economy grew by 0.5%, a marked increase from the 0.3% in the previous three months.
Business confidence was also improving. The Institute of Chartered Accountants in England and Wales (ICAEW) Business Confidence Index rose in Q1, driven by improved sales and greater tax and regulatory clarity post-budget.
The Business Insights and Conditions Survey (BICS) from the ONS reported that businesses are increasingly seeing challenges to their turnover, leading them to increase prices. Responses to the survey showed that businesses are increasingly concerned about labour costs and increasing input prices, with a step change in sentiment happening from the end of 2024 (FIGURE 2).
Source: ONS Business Insights and Conditions Survey
Middle East crisis: actionable levers and practical guidance
The evolving situation in the Middle East introduces understandable uncertainty into cost and pricing assumptions, particularly where energy remains a key risk. While upward pressure on costs is possible, the pace and scale of any impact remain uncertain and will depend on how events unfold over the coming weeks.
Against this backdrop, we would encourage a measured and proportionate response rather than premature adjustments. Current intelligence indicates that decisions are best informed by live pricing data, procurement outcomes and market capacity, alongside appropriate scenario planning. Maintaining discipline and flexibility in how inflation risk is assessed will help avoid unnecessary disruption to investment and delivery decisions.
Economists do expect a return to higher CPI driven by energy costs, and for any further cuts by the Bank of England to be postponed and have questioned whether the Bank Rate should increase to 4.0% to respond to higher inflation rates.
In its latest World Economic Outlook, the International Monetary Fund (IMF) reduced its 2026 UK growth forecast to 0.8%, warning that as a net importer of energy, the UK’s economy is particularly sensitive to rapid changes in energy. The Organisation for Economic Co-operation and Development (OECD) expect the UK to be one of the most impacted advanced economies, with inflation reaching 4.0%.
Parallels may be drawn between the current situation and the onset of the conflict in Ukraine in 2022 when CPI peaked at 11.1%. Yet the market is notably different today. Four years ago, inflation was driven by the post-pandemic surge in demand for construction work alongside global supply shortages. These trends were then exacerbated by the invasion of Ukraine and its significant disruption of the global gas market.
The broader economic impact will be determined less by the initial shock itself and more by its duration and the resulting effects on confidence, investment behaviour and funding conditions.
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