UK Economy Shows Unexpected Resilience as Inflation Lingers

The UK's economy has shown unexpected resilience in the face of an energy price shock caused by the Iran war, but inflation is expected to remain above the Bank of England's target until at least 2029. According to a new forecast from the National Institute of Economic and Social Research (NIESR), gross domestic product growth will reach 1.1% annually in 2026, up from its previous estimate of 0.9%. However, inflation is projected to average 3.1% in 2026, peaking at 3.8% in February 2027.

NIESR's deputy director for macroeconomics, Stephen Millard, noted that the energy shock has weakened the growth outlook and eroded most of the government's fiscal headroom. He also warned that a slowdown is still on the horizon, and that even if peace is restored in the Middle East, inflation will continue to rise.

The forecast suggests that Prime Minister Andy Burnham's commitments on defence and cost-of-living support for households should be funded through higher taxation or spending cuts, rather than borrowing. Additionally, NIESR sees a case for increasing benchmark borrowing costs to 4% from 3.75% if energy prices rise further.