What Lies Ahead in 2026?

The beginning of the year sees the major papers conduct surveys about the outlook for the year ahead.

The Times quoted me on 5th January, in the paper's coverage of their survey of "48 leading economists" about the outlook for 2026:

"Gerard Lyons, chief economist at Netwealth, said the government's spending plans over the course of the parliament "lack credibility". Given the persistent upward pressure on public spending, future additional tax hikes cannot be ruled out, even if unjustified. But I do not expect additional tax hikes in 2026."

Also, in my column for the Sunday Telegraph, on 4th January, 2026, I focused on the global outlook. Here is my opening paragraph that summarised the impact on the UK,  

"One, two, three and six. These four digits describe the likely outlook for the UK economy this year. Growth is likely to be over 1%. Inflation should fall to its 2% target, perhaps as early as this spring. In turn, this means interest rates could be cut to 3%, from their current 3.75%. The big worry though is that the unemployment rate will breach 6%, up from its current 5.1%."

I also thought you'd be interested in my replies to this year's Financial Times survey. (At the start of each year, they ask a group of economists for their answers to specific questions.)

1. Labour Market Outlook. Will "working people" see job prospects and income improve in 2026, and why?

Some will, but many will not.

1. The labour market is likely to soften in 2026, with unemployment rising amid modest economic growth, continued uncertainty about the outlook and higher business costs driven by policy changes.
2. For a significant group of “working people” job security will largely be maintained. This group is also likely to see pre-tax real income gains, as earnings growth, although slower, should outpace inflation. However, post-tax income growth will be more limited due to fiscal drag.
3. Graduates are likely to face particular pressure, either from weaker job prospects as AI reshapes entry-level roles or from high marginal tax rates that constrain disposable incomes.
4. Higher minimum wages will provide a direct boost to those who receive them, but the aggregate impact will be offset to some extent by weaker employment prospects as firms absorb higher wage costs.
5. There will be important sectoral effects. High-employment, low-wage sectors are likely to shed staff and limit hiring as a direct consequence of measures announced in the 2024 and 2025 Budgets.
6. Small and medium-sized enterprises will face a particularly challenging environment, with higher wage costs and the new Employment Rights Bill weighing on hiring decisions.

2. Monetary Policy. Will it be “job done” for the Bank of England in 2026?

No, it will not be “job done” for the Bank of England, even though inflation is likely to fall back to the 2% target during 2026. This is because it remains unclear whether inflation will settle sustainably at the 2% target in subsequent years. In addition, several significant issues identified in the Bernanke Review still require attention. Moreover, the Governor’s November 2025 letter to the Chancellor, in which he praised the success of quantitative easing (QE), wrongly in my view, could place the Bank in a delicate position, particularly if the Government were to request further QE late in 2026 to support increased gilt issuance associated with higher public spending.

In 2026, inflation should ease as service-sector price pressures moderate and is set to fall sharply from April, when changes to household energy bills, alongside freezes in fuel duty and rail fares, reduce the annual rate by around 0.4 percentage points. A further important factor may be global competition, the full impact of which has yet to be fully reflected in forecasts. Since the summer of 2024, China has experienced involution, characterised by intense and widespread competition, evident in sectors such as electric vehicles and solar panels. With inflation in China close to zero, a renewed wave of competitively priced, high-quality exports into Britain and Western Europe could once again dampen inflationary pressures in 2026, much as China did earlier this century.

3. UK Growth Outlook. Do you expect Rachel Reeves to outperform the 1.4 per cent official GDP forecast from the OBR for 2026?

I expect modest growth in 2026. The public spending measures announced in the Budget are front-loaded and interest rates should be able not only to fall to neutral (around 3.5%) but potentially move into accommodative territory (towards 3%) as inflation pressures ease. The savings rate is high and corporate balance sheets appear sound, which should help sustain spending. Decelerating inflation should also boost real incomes. Despite this, policy measures, including the new Employment Bill, add to business costs and will weigh on the economy.

4. Fiscal Policy. Will Labour need to raise taxes again before the next general election?

Yes, taxes are likely to rise again, although a further increase in 2026 could still be avoided. While the tax take is already set to increase, the underlying fiscal numbers lack credibility. They rely on a sharp fall in borrowing towards the end of the decade - conveniently around the time of the next election. Given the persistent upward pressure on public spending, there is little chance that such a reduction in borrowing will materialise
There are several major risks ahead, particularly given that global growth remains imbalanced.
 
6. Productivity. Will the US extend its productivity lead with the rest of the world in the coming years, will it stay the same, or will it shrink?

Yes, the United States is likely to retain its productivity edge. Beyond well-established structural advantages, the US will continue in 2026 to benefit from significantly lower energy costs, a factor that will remain a headwind for the UK. In addition, artificial intelligence represents the most important driver of future productivity growth, and both the US and China continue to lead globally through heavier investment and faster adoption of AI-driven gains.

The European Union is likely to continue lagging in productivity, for the reasons outlined in the Draghi report, compounded by its slow pace in addressing these challenges. The UK’s productivity problem will also persist. However, the UK is in a comparatively strong position outside the Single Market to develop a bespoke regulatory framework for emerging innovative sectors, while the City of London continues to reinforce its position as a leading global financial centre.

7. AI and Jobs. How do you expect AI to affect jobs growth in 2026 in the UK?

It’s unclear what its full impact will be, but we know the sequence of previous technological changes: first comes the substitution effect, which displaces jobs; then the income effect followed by the creative effect, both of which create jobs. The area where AI has the potential to be most transformative is the public sector, provided there is the political will to embrace it, though it is difficult to see such gains materialising as soon as 2026. 

8. What are the main risks?

The most significant challenge is the growing risk of a sovereign debt crisis. While this is more likely to materialise later in the decade, it could still derail global growth and financial markets much earlier, potentially as soon as 2026. The difficulties experienced by France in 2025 should be seen as an early warning.
Policy uncertainty and geopolitics remain key risks, as they were in 2025. These take several forms, including the unpredictability of US policy and the potential for global contagion. In addition, escalating geopolitical tensions could further weaken economic prospects, particularly by disrupting global supply chains.
Finally, financial markets would be vulnerable if global liquidity conditions tighten in 2026. Although attention is focused on the US Federal Reserve, a significant number of central banks worldwide are likely to tighten policy during 2026.

This article reflects personal opinions only and is provided for general information. It should not be taken as financial advice. Always consider doing your own research or speaking with a qualified professional before making financial decisions.