It’s easy to blame the Budget in late November for delaying projects and the surveys suggest that was the case. But we doubt that explains everything; new work across housing and commercial property is slumping. And this is a sector that should in theory be benefiting the most from lower interest rates. On housing at least, we aren’t looking for an imminent turnaround. The impact of past rate hikes is still feeding into the mortgage market, given the prevalence of five-year fixes.
Still, overall the better November data suggests we should get 0.1-0.2% growth for the fourth quarter overall, leaving annual growth for 2025 at 1.4%.
What next? We think 2026 will experience slower growth than 2025 for three reasons. Firstly, yes inflation is set to fall dramatically, but so too is wage growth. And employment is still ticking lower, too. That means disposable income growth will probably be flat – and for household spending to grow materially, we’re going to need to see the recent drop in the savings ratio sustained into the new year.
Secondly, government spending will be less of a tailwind. Departmental budgets are growing much less aggressively in FY2026. Government hiring, which has grown significantly over recent years and has acted as an offset to recent private-sector weakness, is unlikely to be sustained. And remember, the budget deficit is set to fall from 4.5% to 3.5%, largely on account of the tax threshold freeze.
Finally – to the point about construction earlier, overall investment confidence is low. That points to weakness in business investment through the first part of this year, even if faster lending growth hints we could see a bit of a turnaround later on.
None of this is the central consideration right now for the Bank of England, which is much more focused on inflation. We doubt next week’s inflation/wage data will garner enough votes for a February rate cut. Headline CPI is likely to pick up because of volatile air fares. But by March, if the jobs market remains under pressure and wage growth continues to prove benign, then we expect a cut at that meeting – followed by another in June.