Facilitating International Trade Expansion for the UK

The UK is particularly exposed provided its reliance on gas for electrical power rates, which is why the International Monetary Fund (IMF) has revised its UK inflation and development forecasts more dramatically than any other developed economy. Inflation briefly dipped listed below 3% for the first time since early 2025, however the reprieve will be short-term.

ANSR July UK PRs

A weaker labour market and softer demand should avoid a repeat of 2022's double-digit spike, limiting second-round impacts. Our base case is inflation balancing 3.1% in 2026, peaking around 3.5%, before alleviating to 2.5% in 2027, though risks loom big if the Strait of Hormuz remains closed. The UK labour market was already softening before the most recent energy shock, with unemployment rising to 5.0% and jobs at their lowest because the pandemic.

Firms are not yet shedding personnel, however unwillingness to hire is expanding the space in between job development and population development. Greater energy expenses will intensify the pressure, and we expect unemployment to peak at 5.3% by year end. With wage growth slowing to around 3.75% and inflation heading towards 3.5%, real pay looks set to be stagnant another tough year for living standards.

ANSR July UK PRs

Three factors limit the case for walkings: the energy shock is smaller than in 2022, rates are already at a limiting level, and a weaker economy reduces the threat of second-round inflation impacts. That said, rate increases can not be dismissed if energy rates surge further. Gilt yields are most likely to stay raised regardless, driven by the UK's inflation sensitivity and political unpredictability around a prospective modification of Prime Minister, keeping borrowing expenses high throughout the economy even if the policy rate remain on hold.