The UK economy is showing more resilience than recent headlines suggest, despite significant challenges like rising energy prices heading into winter. The labour market remains moderately strong, with the unemployment rate falling to 4.7% in the three months to July, down from 4.9%. While job openings have declined, this reflects softer confidence in the outlook rather than immediate concerns about the present.
Business activity has held up well, with September's PMIs at 51.9 for manufacturing and 52.0 for services, both above the 50-mark indicating expansion. Consumer confidence, though dropping sharply in October, remains higher than at the onset of the Middle East conflict earlier this year. Inflation is a growing concern, with headline CPI rising to 3.5% in September, up from a low of 2.6% in June. Core inflation also edged up to 2.8%, driven partly by an 18% year-on-year increase in energy prices.
Forecasters expect CPI to peak at 4% by early 2027, a level the Bank of England considers a tipping point for entrenched inflation. However, most analysts anticipate inflation will decline after this peak. GDP growth forecasts have been revised upward to 1.3% for this year and 1.1% for 2027, supported by stronger underlying fundamentals and the AI roll-out. The economy expanded by 0.7% quarter-on-quarter in the three months to August.
Bank of England policymakers now expect two-to-three rate rises, with the first anticipated this Bonfire Night. The global bond sell-off, which has driven up government bond yields, may reduce the need for aggressive rate hikes as higher yields tighten credit conditions independently. Overall, the UK economy is performing better than the headlines suggest, with stronger growth and inflation under control.