Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 28
RHYTHMIC REASONING | TEMPO, TIMING AND TUNING
UNITED KINGDOM
Juan Manuel Herrera Betancourt
Senior Economist, Investment Strategy
Latest
2024
2025f
2026f
GDP Growth
1.2%
1.1%
1.2%
1.1%
Inflation
3.8%
2.5%
3.4%
2.5%
Unemployment
4.7%
4.3%
4.7%
4.8%
Budget Bal.
-5.4%
-4.5%
-4.2%
-3.6%
Latest
2024
1-yr fwd
2-yr fwd
3-mo yield
4.2%
4.8%
4.1%
4.0%
10-yr yield
4.7%
4.6%
5.0%
5.2%
Yield curve slope
0.5%
-0.2%
0.8%
1.2%
Source: Scotia Wealth Management, Bloomberg Finance LP.
"Latest" values are as at September 30, 2025 and, for data other than bond
yields, pertain to the most recent monthly, quarterly, or annual reading
available on this date. GDP and inflation forecasts are based on Scotiabank
Economics forecasts dated September 11, 2025. Remaining forecasts are
based on median consensus estimate compiled by Bloomberg | 2024 inflation
and unemployment are based on the average YoY rates for each month of
the year. | 2024 yields are as at December 31, 2024. Forward periods are
relative to September 30, 2025 and are based on forward market pricing.
fiscal worries and elevated government disapproval rates may
further impact these plans, while weighing on overall economic
confidence.
We forecast U.K. economic growth to sit around 1% in each of
2025 and 2026, following a muted 1.1% rise in 2024, and well below
the pre-pandemic decade average of 2.0%. Although structural
headwinds such as those associated with Brexit, labour supplydemand mismatches, chronic underinvestment, and a shift higher
in neutral interest rates mean the U.K. is unlikely to revisit its
2010-2019 averages, weak growth this year and next would remain
well below the country’s ‘new’ ~1.5% potential rate of expansion.
Strength observed in early-2025 on tariffs front-running and oneoff aircraft investments has predictably proven unsustainable,
uncovering weakness in household spending and muted private
investment trends that was only counteracted by a surge in
government spending. After growing by 0.7% quarter-on-quarter
(QoQ) in 1Q25, the U.K. economy significantly slowed to a 0.3% rise
in 2Q, with similar QoQ growth expected over the second half of
the year and into 2026.
Fig. 1: The U.K. labour market has steadily weakened
6%
•
3%
•
•
•
Falling employment numbers amid higher labour costs
and weak business sentiment are teeing up another year
of disappointing U.K. GDP growth in 2026, eyeing a ~1%
expansion for the third consecutive year.
U.K. payrolls have now fallen for 11 out of the past 13 months
with firms blaming minimum wage hikes, higher employer
pension contributions, and political and trade uncertainty.
Government spending is expected to remain the U.K.’s
growth leader over the next few quarters, albeit at a
decelerating rate, but ongoing fiscal worries and elevated
government disapproval rates may impact these plans.
The BoE has had to stick to a highly cautious approach that
falls short of supporting the economy.
Falling employment numbers amid higher labour costs and weak
business sentiment (Fig. 1) paired with middling investment trends,
tax increases, restrictive policy rates, and global uncertainty are
due to extend the U.K.’s sub-potential GDP expansion for a fourth
straight year in 2026. Government spending is expected to remain
the U.K.’s growth leader over the next few quarters, albeit at a
decelerating rate—particularly from around mid-2026. Ongoing
YoY % change
KEY CONCLUSIONS
0%
-3%
-6%
2016
2018
Total payrolls
2020
2022
Public, defense, health, educ
2024
All other
Source: ONS, Scotia Wealth Management
Within the 2Q slowdown, spending by households pulled back to
only a 0.1% gain from the 0.3% recorded in 1Q, while fixed capital
formation slowed to 0.5% after a 1.9% rise to start the year. In
contrast, government spending jumped off a 0.2% 1Q drop to a
1.3% QoQ increase that was well above pre-pandemic averages
of 0.4%, as PM Starmer’s administration ramps up spending on
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