NIESR raises its UK growth forecast for 2026 but warns of a slower two years ahead
The National Institute of Economic and Social Research has raised its forecast for UK growth this year while warning that higher energy costs and borrowing rates will weigh on the following two years. Its autumn outlook puts 2026 growth at 1.6 percent, compared with 1.1 percent in its July forecast, before a slowdown to 1.1 percent in 2027 and 0.9 percent in 2028.
The institute attributes the stronger near-term result to government spending and business investment, especially in energy and information and communications technology. Household consumption has improved after several weak years but remains subdued by historical standards. Its projections assume that fiscal consolidation proceeds while energy costs squeeze real household incomes and company margins. These are conditional forecasts, not figures already recorded for future years.
Inflation could persist beyond the immediate energy shock
NIESR expects consumer-price inflation to peak at 4.4 percent in February 2027, then average 3.9 percent during 2027 and 3.0 percent in 2028. Under its central assumptions, inflation does not return to the 2 percent target until late 2030. The concern is that the energy shock may feed into wages and wider prices, particularly as many annual pay awards are settled early in the year.
The institute expects Bank Rate to peak at 4.25 percent next year but argues that this would not restrain inflation quickly enough. A separate scenario based on market rates reaching about 4.75 percent would bring inflation back to target in early 2029, at the cost of roughly 0.4 percentage points less GDP growth in both 2028 and 2029. That comparison illustrates a policy trade-off; it is neither a new Bank of England decision nor a promise that market pricing will be realised.
The outlook identifies risks in both directions. An earlier settlement of the Middle East conflict could reduce energy and food costs faster than assumed. Persistent high oil prices or a reversal in AI-linked investment could produce weaker growth. The improved 2026 forecast therefore sits alongside a warning about the durability of the expansion, rather than removing uncertainty for borrowers, households or businesses.