3 Minute Read
Moderate growth despite challenges
Last year, the UK economy started on a solid footing, supported by modest growth and interest rate cuts.
GDP expanded by 0.9% in H1 2025, and the Bank of England (BoE) delivered two rate cuts. However, global uncertainty – exacerbated by US trade policy and elevated inflation – tempered momentum as the year progressed. As we move into 2026, the outlook remains uncertain.
With key trade agreements now in place and energy and food price pressures expected to ease, inflation is forecast to return to just above target by mid-2026. This environment should allow the BoE to implement an additional rate cut in 2026, continuing its gradual loosening cycle.
Lower interest rates, combined with falling inflation, are expected to support real wages and underpin household consumption. Further support will come from increases in the minimum wage, but households have remained cautious in recent years, maintaining elevated savings.
Consumer sentiment has improved, particularly regarding personal finances and major purchases, however rising unemployment might dampen enthusiasm. This should support modest consumption growth through 2026–2027, despite weaker income trends.
The 2025 UK Autumn Budget – through extended tax thresholds, new levies, and higher rates on investment income – was largely contractionary with prospects of longer-term fiscal tightening. This fiscal drag could temper consumption-led growth, even as targeted welfare measures offer limited relief.
Despite a more stable inflation backdrop, overall growth is expected to soften slightly in 2026. This reflects tighter fiscal policy and slower income growth, even as monetary conditions ease. In a global context, this moderation is not unique.
Figure 1: CBRE economic forecasts
Note: 2025 data points remain as estimates and are subject to change
Trends to watch
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Gilt Yields
Higher gilt yields remain a defining feature, mainly driven by fiscal constraints and elevated debt levels. Consensus forecasts for ten-year rates show a spread of 110 basis points ranging from 3.75% to 4.85%, with forward-implied yields leaning toward the upper range, underscoring uncertainty in the yield outlook. Our expectation is for the ten-year gilt yield to settle at c. 4.3%. However, any downward shift in bond yields, whether through global stabilisation or accelerated rate cuts, could ease financing costs and support real estate asset valuations.
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Inflation
Inflation, having been elevated throughout 2025, is expected to trend closer to target in 2026. However, stickier-than-expected inflation could impact the BoE rate cuts trajectory and weigh on confidence and erode households’ spending potential.
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Labour Markets
Despite muted GDP growth, labour markets remained relatively tight in 2025. However, unemployment has risen, and is expected to increase in 2026, and further deterioration could dampen household confidence and consumption, amplifying potential downside risks to the growth outlook. However, if unemployment were to rise significantly, pressure on inflation would ease. This may in turn prompt additional rate cuts from the BoE, which could ease financing costs for real estate.