Barclays outlines 5-year economic forecast for the U.K.

Investing.com - Ahead of Chancellor Rachel Reeves’s Budget in November, Barclays has outlined its five-year U.K. economic forecast.

Reeves is set to produce her latest Budget on November 26, and the economic backdrop is a difficult one, analysts at Barclays say, in a note dated Oct. 15. 

“Following a positive start to the year, growth is decelerating, and the growth we have seen has been driven disproportionately by the public sector and net trade, as opposed to private domestic demand,” Barclays said.

The unemployment rate has risen 0.5 percentage points in the past 12 months and is now the highest it has been since 2016, outside of the COVID-19 pandemic. Meanwhile, inflation remains well above the Bank of England’s 2% target, and higher than that of international peers, making the Monetary Policy Committee cautious about further cuts to interest rates, which remain in restrictive territory.  

“Against this backdrop, the Chancellor is likely to need to find a sizable fiscal consolidation at the Budget to meet her fiscal rules,” the U.K. bank added.

The outlook in the very near term is one of economic softening, the bank said. 

“We forecast growth will decelerate further in the second half of this year, with the economy growing at half the rate it did in the first half,” Barclays said.

The Bank of England is set to continue reducing interest rates to the point where they are no longer acting as a headwind to the economy. 

“Our forecast assumes Bank Rate reaches 3.5% in the first half of 2026. Inflation is likely to have peaked already in September 2025, spurred by a combination of energy price base effects, food price inflation, and changes in taxes and prices set by the government,” the bank said. 

Headline CPI inflation should drop back to target in the first half of next year as the effect of the tax changes announced in last October’s Budget drops out of the calculation. 

“As monetary policy easing starts to feed through more meaningfully, we should see a cyclical rebound in activity in 2026 and 2027 as the economy starts to absorb existing slack. In our baseline scenario, the unemployment rate is forecast to peak at 5.1% in 2026 before gradually falling,” said Barclays.

“We expect the OBR to make a downward revision to its own productivity growth assumption of between 0.1 and 0.2 percentage points per year, and this is perhaps the single biggest forecast judgement the OBR will make.”

Beyond the near-term fiscal implications, productivity growth will likely be the single biggest determinant of living standards over the longer run.

"In our baseline forecast, increasing productivity enables real wage growth over the medium term. Despite falling average hours, total hours worked increase and real incomes grow at an average of 1.1% annually. Alongside a gradual reduction in the saving rate from 10.8% in June to 9.3% in 2030, we expect this to lead to household consumption growth of 1.4% per year in the medium term," Barclays added.

The bank expects the Chancellor to be able to make the required consolidation at the upcoming Budget with relatively limited damage to real GDP growth and mild disinflation.

“However, this is predicated on her doing so without applying measures that, mechanically or otherwise, add substantially to near-term inflation,” Barclays added.