# UK Economy Briefing: May 2026

_Issue one of our new monthly economic briefing from the desk of Neil's favourite economist. UK growth picked up to 0.6% in Q1 2026 and, with the labour market soft and wage pressures easing, in our view Bank Rate is likely to stay at 3.75% and resume a downward path once the energy shock unwinds._

Neil Woodford · 19 May 2026 · 6 min read

![UK Economy Briefing: May 2026](https://cdn.sanity.io/images/v3acfbvo/production/8f913eb7b51b8f4a36a26c7a0ea80f40f88e5bb1-4418x2945.jpg?w=1600&fit=max&auto=format)

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## Introduction

Economic commentary these days tends to be dominated by a systemically downbeat consensus narrative. I have never been a fan of this sort of group think. The economists I have respected most through my career have all shared one habit: they pay attention to the data, they form a view independent of the consensus, and they hold that view long enough for it to matter.

My favourite economist is one of those people. He is an independent macro analyst whose monthly briefing is read by some of the most serious institutional investors in the UK. His work is data-rich, opinionated where it needs to be, and refreshingly free of the consensus-hugging that infects so much sell-side research.

Exclusively for subscribers, we will be sharing his monthly briefing with you – focused on what has actually changed in the data, where he disagrees with the Bank of England or the consensus, and what it means for UK gilts, equities, and the wider economy.

You should know that I will not necessarily share every view expressed in these notes. That is the point. Independent analysis is more useful when it is genuinely independent.

— Neil

UK economic activity strengthened in the first quarter of 2026, with real GDP growing 0.6%, and while higher energy prices following the conflict in the Middle East have pushed up consensus inflation forecasts and market interest rate expectations, in our view Bank Rate is likely to remain at 3.75% and resume a downward path when the energy shock unwinds.

## The economy

Latest estimates show the UK economy slowing by less in the second half of 2025 than reported previously and growing at an above-average rate in the first quarter of 2026. Monthly estimates show output increasing by 0.4% in February and 0.3% in March. On our arithmetic, quarterly real GDP growth came in at 0.6% in 2026 Q1. In the four quarters to 2026 Q1, our estimates put real GDP growth at 1.1%. If output in Q2 remains at March levels, because of base effects, output growth in Q2 will be about 0.25% compared with Q1, and about 1.25% YOY, close to 0.5% higher than the MPC forecast in April.

The Bank of England's Monetary Policy Committee – the MPC, which sets policy interest rates – takes a more cautious view of growth from here. The April Monetary Policy Report shows real GDP stagnating in Q2 and Q3, growing only modestly in Q4, and four-quarter growth remaining below 1% throughout 2026 and the first half of 2027. On our estimates, the impact of higher energy prices on real activity is offset by a lower household saving ratio – as it was in 2022, when energy prices rose by more than 40%, compared with a probable increase of less than 10% in 2026. With the saving ratio close to 10% on a four-quarter basis, households have material capacity to draw down accumulated savings rather than cut spending one-for-one with the squeeze on real incomes. Assuming oil prices average around $100 per barrel and gas prices remain close to current levels, our arithmetic shows four-quarter real GDP growth rising to around 1.5% in 2026 Q4 and to around 2% in the second half of 2027.

The lead headwind is energy. Sharply higher energy prices following the outbreak of hostilities in the Middle East are expected to weigh on economic activity during 2026. Consensus forecasts now put real GDP growth in 2026 as a whole at around 0.75%, compared with forecast growth of a little over 1% before the conflict. Consensus forecasts for CPI inflation in 2026 Q4 have increased from 2.25% to 3.25% over the same period.

Mortgage conditions, by contrast, continue to support household spending. As Bank Rate fell from 4.75% to 3.75%, the interest rate on new mortgage loans fell steadily during 2025 and fell further in the first quarter of 2026, to a little over 4% in March. Housing transactions increased by more than 10% in 2025 and rose further in 2026 Q1. Mortgage lending growth rose above 3% during 2025 and remained above 3% in 2026 Q1.

## Inflation and interest rates

Consumer price inflation (CPI) fell from 3.3% in March to 2.8% in April, which was someway below consensus expectations. Higher fuel prices were more than offset by base effects and a 7% reduction in the energy price cap alongside lower service and food inflation. Looking forward, inflation should increase slightly in May and June to leave Q2 inflation slightly above 3%, unchanged from Q1. After a probable 12% increase in the energy price cap and assuming that oil prices stay at about $100 per barrel, our estimates show CPI increasing to 3.25% in July and remaining around that level through the second half of 2026. That leaves the 2026 full-year average at around 3.25%, similar to the average in 2025. The pickup is energy-driven. Wage pressures have eased materially as the labour market has softened, and on our estimates underlying inflationary pressures continue to ease even as headline inflation rises.

Overall, our arithmetic shows inflation falling towards the 2% target during 2027. If oil prices were to fall to around $80 per barrel by the spring of 2027 and the energy price cap were to fall by around 10% over the same period, then on our arithmetic inflation would fall below the 2% target before the end of 2027.

The market response to the energy shock has been substantial. In response to higher energy prices, market interest rate expectations for the end of 2026 have risen from 3.25% to around 4.25%. Currently, market expectations are for interest rates to remain above 4% in 2027. Mirroring this, 10-year gilt yields – the yield on ten-year UK government debt, a key benchmark for long-term borrowing costs – have risen from 4.25% to around 5%.

In our view, the market has moved further than the underlying data warrant. With the labour market likely to remain soft and wage growth set to slow further – and with the rise in inflation likely to prove relatively modest and temporary – Bank Rate can be expected to remain at 3.75% and resume a downward path when the impact of the increase in energy prices unwinds. As that happens, market interest rate expectations are, in our view, likely to be revised down, lowering gilt yields accordingly.

## The public finances

Higher taxes resulted in the budget deficit falling by £20 billion in 2025-26. Overall, the budget deficit was equivalent to 4.25% of GDP in 2025-26, down from 5.25% of GDP in 2024-25. As tax allowances remain frozen – frozen tax thresholds quietly increase tax revenue as wages rise – and growth in government spending slows, our estimates show the budget deficit falling to 3.5% of GDP in 2026-27. On current policy settings, our arithmetic shows the deficit falling to less than 2% of GDP in 2029-30, and the current budget moving into surplus over the same period.

## In summary

Output growth strengthened in the early part of 2026, with quarterly real GDP coming in at 0.6% in Q1. The energy shock has pushed consensus forecasts for inflation higher and pushed market interest rate expectations sharply higher, but on our estimates the impact on real activity is offset by a lower household saving ratio – as it was in 2022, when the energy shock was several times larger. With the labour market soft and wage growth slowing, Bank Rate is in our view likely to remain at 3.75% and to resume a downward path when the impact of higher energy prices unwinds, with market interest rate expectations and gilt yields likely to be revised down accordingly. The main risk to this view is a more persistent rise in energy prices than the assumptions on which our estimates are based.

**About this series.** _UK Economy Briefing_ is a monthly briefing for subscribers, distilling the work of Neil's favourite economist. Each issue focuses on what has changed in the UK macro data, where he disagrees with the consensus, and what it means for UK gilts, equities, and the wider economy.