“Capital Economics argues the UK economic consensus for 2026 may err in four key areas: underestimating softer consumer spending growth at 0.7% versus 0.9%, a quicker inflation drop to 1.8% against 2.2%, Bank Rate cuts to 3% below the expected 3.50%, and 10-year gilt yields falling to 4.25% rather than 4.35%. Fiscal policy risks could undermine these projections by allowing more budgetary slack.”
Forecast Divergences and Economic Indicators
Capital Economics’ analysis points to potential misalignments in the prevailing UK economic forecasts for 2026, drawing on current indicators showing GDP growth at a sluggish 0.1% in the third quarter of 2025 and annual expansion of 1.3%. With unemployment hovering at 4.7% and CPI inflation elevated at around 3.5% in late 2025, the firm anticipates a more subdued trajectory than the broader consensus.
The brokerage’s GDP projection stands at 1.0% growth for 2026, below the consensus of 1.2%, influenced by restrained domestic demand and lingering effects from prior rate hikes. This contrasts with optimistic views expecting a rebound driven by easing monetary policy.
Four Key Areas of Disagreement
Consumer Spending Slowdown : Projections indicate consumer spending growth will lag at 0.7% in 2026, compared to the consensus of 0.9%. This stems from higher taxes and softer wage gains, with real household disposable income expected to rise by only 1.2% against a consensus of 1.5%. Unemployment is forecasted to peak at 5.1% in 2026 before easing to 4.9% in 2027, amplifying pressure on households.
Accelerated Inflation Decline : CPI inflation is seen falling faster to 1.8% by end-2026, undercutting the consensus of 2.2%. This reflects weaker demand and supply chain stabilizations, with core inflation dipping to 2.0% versus expectations of 2.3%. Services inflation, a persistent concern, is projected at 2.5%, lower than the 2.8% consensus.
Deeper Interest Rate Cuts : The Bank of England’s Bank Rate is expected to reach 3% by end-2026, below the consensus 3.50%. This aligns with Capital Economics’ view of a neutral rate around 3%, supported by current rates at 4.75% and anticipated easing amid cooling inflation.
Lower Gilt Yields : The 10-year gilt yield is forecasted to decline to 4.25% from the current 4.40%, against a consensus of 4.35%. This anticipates a dovish monetary stance and reduced issuance pressures, though global factors like U.S. Treasury movements could influence outcomes.
Comparative Forecast Table
Fiscal Policy as a Wild Card
| Indicator | Capital Economics Forecast (2026) | Consensus Forecast (2026) |
|---|---|---|
| GDP Growth | 1.0% | 1.2% |
| Consumer Spending Growth | 0.7% | 0.9% |
| CPI Inflation (End-Year) | 1.8% | 2.2% |
| Unemployment Rate (Avg.) | 5.1% | 4.8% |
| Bank Rate (End-Year) | 3.00% | 3.50% |
| 10-Year Gilt Yield (End-Year) | 4.25% | 4.35% |
Fiscal tightening outlined in recent budgets may not materialize fully, potentially expanding headroom from £21.7 billion to £40 billion. This could sustain higher spending, buoying demand but risking persistent inflation above targets. If fiscal discipline holds, it would reinforce the downside scenarios for growth and rates.
Implications for Markets
Bond markets could see increased volatility if yields undershoot expectations, benefiting fixed-income investors. Equity sectors sensitive to consumer demand, like retail and leisure, face headwinds, while exporters might gain from a weaker pound projected at 1.25 USD/GBP by mid-2026.
Disclaimer: This news report is for informational purposes only and does not constitute financial advice or investment recommendations. All tips and insights are based on publicly available sources.
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