Leading Indicators | UK outlook steadies as fiscal credibility comes into focus

UK fiscal consolidation expected to move faster than peers

IMF forecasts suggest the UK is set for one of the sharper fiscal consolidations among major economies, with the deficit expected to narrow to around 1.6% of GDP by 2031. For the new Prime Minister, delivering that adjustment credibly will be key while debt remains close to 95% of GDP and gilt markets remain sensitive to fiscal slippage.

Soft labour market set to keep BoE on hold in July

Private sector wage growth, a key measure watched by the Bank of England, slowed to 2.9% YoY, its weakest pace since October 2020. With unemployment steady at 4.9% and payrolls falling by less than expected in June, the labour market remains soft but stabilising, supporting expectations that the base rate will remain on hold at 3.75% on 30th July.

Temporary inflation pressures, but outlook remains contained

Inflation is expected to rise over the coming quarters, with CPI forecast to peak around 3.4% in late 2026 as energy and utility costs feed through. However, softer wage growth and easing domestic pressures should support a gradual return towards the BoE’s 2% target in 2027. While geopolitical risks remain, the inflation backdrop looks materially less challenging than in 2022, supporting a measured easing cycle.