ECONOMIC OVERVIEW

Resilience despite a turbulent market

Recent data releases from the Office for National Statistics (ONS) for growth and inflation show that the economy is proving to be more resilient to conflict in the Middle East than many independent forecasters expected. Whilst modest compared to historical standards, the economy has grown ahead of expectations.

Better than expected growth but signs of cooling

Despite geopolitical shocks, gross domestic product (GDP) increased by 0.5% in Q2 2026 after an increase of 0.6% in Q1 (Figure 1), and annual growth of 1.4% has exceeded expectations. Stronger business investment, particularly in technology, has been a key contributor to this expansion.

Looking ahead, most independent forecasts agree that economic growth is likely to moderate over the remainder of the year, as high inflation continues to reduce household spending power. Even so, they project growth of 1.5% for this year, higher than the 0.9% consensus forecast which was published in June 2026.

Inflationary pressures have eased from the peaks seen in recent years but remain persistent. Core inflation has been relatively stable at 2.6% in the year to August 2026. Yet, higher energy costs and continued geopolitical uncertainty are likely to keep consumer price inflation (CPI) above the Bank of England’s 2.0% target through the remainder of the year.

The labour market is also showing signs of cooling. The yearly pace of wage growth has moderated, and the number of job vacancies has declined. Although labour market conditions have softened, financial markets remain focused on persistent inflationary pressures and rising energy costs. As a result, expectations for interest rate reductions have receded with markets now expecting tighter monetary policy to bring inflation back to target. Taken together, these trends suggest that while the UK economy has demonstrated resilience in 2026, growth is likely to be more subdued in 2027 as higher borrowing costs and energy prices continue to weigh on activity and investment.

Source: ONS

Businesses adapting to an environment of shocks

Business confidence, as expressed in market sentiment surveys, tend to reflect the very latest news making their ‘shelf-life’ in this volatile environment limited, however, recent surveys suggest that there has been an easing in perceptions of uncertainty.

The Lloyds Business Barometer found that whilst business confidence has weakened sharply, falling 12 points to 41.0% and its lowest level since April 2025, it remains above the long-term average of 30.0%, suggesting that businesses remain relatively resilient. The survey states that while businesses have become more cautious about the economic outlook, confidence remains above its long-term average, and most firms continue to expect activity levels to increase over the year ahead. This suggests that, although uncertainty is weighing on investment and hiring intentions, underlying business resilience remains intact.

New leadership at Number 10

Since becoming Prime Minister, Andy Burnham has consistently put housing, infrastructure, and economic growth at the centre of the government's ambitions. Together with an expanded devolution agenda, this is shaping investment decisions in the built environment. Drawing on the successful public-private partnership models developed in Greater Manchester, this approach seeks to give regional leaders greater control over housing, transport, regeneration, and economic development.

Recent announcements that regional mayors will receive enhanced powers and long-term, predictable funding streams with fewer central constraints could have the potential to play a significant role in accelerating local housing delivery, transport infrastructure, town centre regeneration, and skills programmes. For the construction sector, this could create a predictable pipeline of work while enabling regions to bring forward projects that are aligned with local needs and priorities.

Against a wider backdrop of significant support for the housing sector through a council housing programme and the “Your First Home Scheme”, the Great British Grid and wider utility reforms, the government needs to ensure that ambition is met with delivery capacity which requires consistency and certainty. Combined with investment in skills and apprenticeships, these initiatives could support sustained demand across the industry.