After a stronger-than-expected performance in 2025, the UK economy faces a more challenging period ahead.
Tariff pressures, persistent inflation, and tighter fiscal policy weigh on demand, while elevated borrowing costs continue to strain business margins.
With insolvency levels still heightened, companies need to closely monitor financial resilience and stay agile as conditions evolve.
UK growth has surprised in 2025. After a strong start to the year, the UK is on course to achieve forecast growth of around +1.4% this year, up +0.5pp from our previous economic outlook, and outperforming many peers. However, ahead of the Chancellor’s Autumn Budget, the outlook is sombre.
Amid a slowing world economy and tariff uncertainty, UK growth is expected to slow to +0.9% next year and +1.2% in 2027. Inflation remains elevated, wage growth is slowing (pay growth slowed to 4.7% in the August-June period, its lowest since 2022), and consumer confidence remains low. Fiscal policy is widely expected to tighten, with the prospect of tax rises and spending cuts looming. While consumption could pick up in 2026, we expect any recovery to be underwhelming.
UK inflation is proving particularly sticky. While we expect inflation to gradually normalise in the Eurozone, UK inflation is forecast to climb to +3.4% in 2025 (up from +2.5% in 2024). Driven by higher energy costs and food prices, the UK has the highest forecast inflation rate of the G7 advanced economies this year.
The Bank of England (BoE) has not achieved its 2% target since July 2021 (except a brief dip below 2% in September 2024), and there are signs that the private sector is increasingly sceptical about the central bank’s ability to deliver on its inflation targets. That said, we expect UK inflation to fall back to +2.9% in 2026 and settle around its +2% target by the spring of 2027 as the BoE re-focusses its attention on fighting inflation and tightens macro policy.
The UK economic outlook is also clouded by fiscal challenges. Amid lacklustre economic growth and high levels of public debt, the UK’s public finances look vulnerable. The UK has the sixth-highest debt, fifth-highest deficit, and third-highest borrowing costs among 36 advanced economies, according to the Office of Budget Responsibility. 30-year gilts recently hit their highest levels since the 1990s as large deficits, a hawkish Bank of England, and lingering memories of the “Truss moment” compound supply pressures. As a result, we expect fiscal policy in the UK will remain under pressure well into 2027.
The global economic picture offers little cheer for UK businesses, with concerns for stagnation now materialising. Global GDP growth is expected to decelerate from a forecast +2.7% in 2025 to +2.5% in 2026, while inflation is predicted to remain elevated at 3.9% in 2025 and 3.5% in 2026. Major economies are experiencing their lowest growth levels since 2008, including many of the UK’s main export markets.
Caught between mounting headwinds from tariffs and surging AI investment, the US economy is projected to grow by just +1.8% in 2025 and +1.6% in 2026, among the lowest growth rates since the start of the century. Despite an expected gradual pick-up in domestic demand, risks to Eurozone growth remain skewed to the downside: Eurozone GDP is expected to fall to +0.9% in 2026 from a forecast +1.2 in 2025.
The ongoing trade war and wider geopolitical volatility remains a major source of downside risk for the UK and global economies. The volume of global trade of goods and services is expected to slow to +0.6% in 2026 from +2% in 2025, according to Allianz Trade analysis. Despite the UK-US trade deal implemented in June, which reduces US tariffs on UK exports like cars, steel, and aerospace products, US tariff hikes are expected to impact UK GDP growth in 2026 by just under -0.2pp.
Heightened protectionism is perhaps the greatest threat to the global economy. We assign a 45% probability of global trade entering recession due to further US tariff escalation through Sector 232 tariffs, removal of product exclusions, and an end of the US/China truce. Such a scenario would have a severe negative impact on global growth, with downward pressure on global prices and higher interest rates. In addition, geopolitical tensions could rise further, with a NATO-Russia conflict, an escalation in the Middle East, and open conflict between China and Taiwan as potential risks.
The BoE warned in October that the risk of a potential sharp correction in equity markets remains high. Equity market valuations for AI-focussed technology companies appear stretched: The market share of the top five members of the S&P 500 is close to 30%, higher than at any point in the past 50 years. We assign a 20% probability to an AI bubble burst, in which companies and investors reassess the profitability and valuations of AI technologies. Such a burst would likely slow global growth, reduce investment flows, and lead to enterprise failures.
The BoE also warned of an increased risk of a potential correction in sovereign debt markets. Elevated debt levels and persistently high long-term interest rates are straining public finances, particularly in the UK, France, and Italy, but also in the US. We assign a 20% probability to a large-scale sovereign debt crisis, which would carry severe costs for global growth and inflation, and likely lead to a higher cost of financing for businesses.
High borrowing costs and weak demand are squeezing margins, with little sign of relief until the spring. With UK inflation showing no sign of cooling, we expect the BoE to keep rates on hold until April 2026, with further cuts in Q3 and Q4, bringing the bank rate to 3.25% by end-2026. Insolvencies in the UK remain elevated. While UK insolvencies are expected to be stable in 2025, they are still significantly above pre-pandemic levels (+31%).
The global picture also suggests additional risks: our Global Insolvency Outlook anticipates a +5% y/y increase in the first half of 2025, following a +10% and +7% for the full years 2024 and 2023 respectively. Overall, we expect full-year insolvencies to rise in three out of five countries, which will record more cases than averaged over the 2016-2019 period. This upward trend in insolvencies is likely to continue into 2026 globally, though at a slower pace.
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