UBS estimates that the UK economy will enter a more sustainable growth trajectory in 2026 after weak momentum in the second half of 2025. At that time, GDP grew by only 0.1% quarter-on-quarter in both Q3 and Q4.

The bank expects growth to accelerate to 0.3% in Q1 2026 and to 0.4% in Q2. Growth could reach 1.1% by the end of the year, accelerating to 1.4% in 2027. Inflation, which fell to 3% y/y in January, is forecast to remain at this level in February and may drop to 2% in April. This decline will be driven by lower utility bills and the waning effect of previous administrative price adjustments. On average, inflation is expected to reach 2% in 2026, down from 3.4% a year earlier.

Against this backdrop, the Bank of England is likely to continue easing policy. UBS projects a 25 bps rate cut in March to 3.5%, followed by a further 25 bps in June to 3.25%. However, the bank estimates that risks are skewed toward a deeper cut.

Analysts believe the government's spring budget statement on March 3 will not bring radical changes. Although the fiscal buffer may be lower than the November estimate of £22 billion, it should be sufficient to avoid major policy adjustments.

The political situation remains a separate factor of uncertainty. Despite Prime Minister Starmer's recent support from fellow party members, the risk of intra-party challenges remains. UBS notes that a possible change in leadership and the Chancellor of the Exchequer could impact the budget strategy and fiscal discipline parameters.