The Middle East peace process has faltered, keeping oil prices above $100 a barrel through September and October, up from around $70 in early July. Gas prices, which significantly impact UK inflation, have more than tripled since February. Despite these energy shocks, global activity has held up better than expected, with AI-driven investment in the United States and its Asian suppliers outweighing the drag from the conflict. The forecast for global growth this year has been revised up to 3.1 per cent, from 2.9 per cent in July, with emerging economies leading the way.
The UK economy has also proven stronger than anticipated, with growth this year revised up to 1.6 per cent, from 1.1 per cent in July. This strength comes from government spending and business investment, particularly in energy and ICT. However, growth is expected to slow to 1.1 per cent in 2027 and 0.9 per cent in 2028 as higher energy costs and the government's deficit reduction plan take effect.
Inflation remains a concern, with CPI inflation at 3.5 per cent in September and expected to peak at 4.4 per cent in February 2027. The Monetary Policy Committee raised the Bank Rate by 25 basis points to 4.0 per cent on 5 November, its first hike since August 2023. Markets price the Bank Rate reaching around 4.75 per cent next year, which is closer to what is needed to bring inflation back to target.
The ten-year gilt yield reached 5.5 per cent on 8 October, its highest level since 2000. The Budget of 28 October did not address the rising debt interest costs, with headroom against fiscal rules falling to £14.5 billion. The deficit reduction plan lacks credibility, requiring a £100 billion turnaround in the primary balance over five years. These policy shortcomings compound the shocks from abroad, adding to the economic challenges.