UK economy expected to grow 1.4% in 2026 despite weaker unemployment
The euro zone’s GDP is forecast to slow just slightly to 1.2% this year and inch upwards to 1.4% in 2027, said analysts
[LONDON] Things are starting to look up for the UK and the euro zone this year as they aim to build on an uncertain 2025 that saw the economy, stock market and currencies perform reasonably well, observers said.
The euro surged by 15 per cent against the US dollar in 2025 and the pound rose by 9 per cent versus the greenback.
As for Europe’s main stock markets, Germany’s DAX rose by 23 per cent last year, the FTSE 100 was up by 22 per cent, and the pan-European Stoxx 600 index was up 17 per cent. Comparatively, France’s CAC index underperformed even though it did rise by 10 per cent.
On the economic front, the UK economy returned to growth as it expanded by a more-than-expected 0.3 per cent in November, according to data released by the Office for National Statistics released on Thursday (Jan 15).
The UK’s National Institute of Economic and Social Research said it expects the British economy to grow by 1.4 per cent for the whole of 2025 – higher than the previous year’s 1.1 per cent expansion.
The Office for Budget Responsibility – the government’s official forecaster – said it estimates the British economy to expand at the same rate of 1.4 per cent in 2026, and 1.5 per cent in each of the following four years.
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Many economists and analysts expect the Bank of England (BOE) to continue with easy money and to cut interest rates from the current level of 3.75 per cent to around 3.25 per cent. They also predict that inflation will by fall more than 1 per cent to head closer towards the central bank’s target of 2 per cent.
“Despite the predicted rate decline, overall prices remain a lot higher than pre-pandemic levels,” said Brendan Brown, a London-based economist and financial analyst. “High prices are denting consumption and hurting the economy.”
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, was quoted in a recent report in The Guardian as saying that the UK’s return to growth in November “probably won’t trigger a sustained economic revival”.
Softer consumer spending amid a higher tax burden and rising unemployment will likely see the UK’s growth stay flat at around 1.4 per cent in 2026, despite a welcome boost from lower inflation, he said.
“These figures make a February rate cut less likely by giving those rate-setters (who are) still concerned over inflation sufficient comfort over the economic conditions to delay voting to ease policy again,” he added.
The unemployment rate in the UK reached 5.1 per cent in October last year, the highest level outside of the Covid-19 pandemic in a decade. Goldman Sachs Research expects the unemployment rate to go up further to 5.3 per cent by March this year, and to stabilise for the rest of the year as economic growth picks up.
Despite the lingering pessimism, British inventor and entrepreneur James Dyson is among those who believe that there are still plenty of growth opportunities for businesses and investors in the UK in the coming years.
“Britain can prosper again if it returns to being a nation of doers,” said the 78-year-old in an interview with BBC Radio.
“We should reject what the doomsayers say about Britain. Our decline is not inevitable, nor beyond our control. There is so much raw potential in our country that can be realised if we embrace aspiration and inventiveness.”
Debt, deficit to increase in Europe
The European Commission’s (EC) latest assessment is that the euro zone’s full-year growth will be better in 2025 compared to the year before, and that the economy will grow at or above potential in 2026 and 2027.
The EU’s executive arm, however, also noted that debt and deficit will increase too due to larger expenditure on defence.
The EC said that the gross domestic product in the 20 countries that share the common euro currency would grow 1.3 per cent in 2025, higher than the 0.9 per cent growth recorded in 2024.
In 2026, growth is expected to slow to around 1.2 per cent before inching upwards again to 1.4 per cent growth in 2027, the EC said.
KPMG wrote in its latest European Economic Outlook report in December that the euro zone’s fiscal policy would be “broadly neutral” in 2026, as consolidation efforts in many countries offset increased public spending on infrastructure and defence in Germany.
As for the EU, which is a larger bloc of 27 countries, the EC projected the EU’s real GDP to grow by 1.4 per cent for both 2025 and 2026, and edge up slightly to 1.5 per cent in 2027.
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