The Spring Statement delivered by Chancellor Rachel Reeves on March 12 was marked by fiscal caution, containing no major policy shifts amid a deteriorating economic picture. The OBR's updated projections paint a subdued path for growth: 1.1% in 2026, followed by 1.6% in both 2027 and 2028, and 1.5% in 2029 and 2030. Unemployment is now forecast to peak at 5.3% this year—already nearing with a five-year high of 5.2% in the final quarter of 2025—before easing to 4.1% by 2030.

Inflation Eases, Paving Way for Rate Cuts

Offsetting some gloom, inflation is expected to decline faster than anticipated, reaching 2.3% in 2026 and hitting the Bank of England's 2% target by early 2027. This outlook stems from factors including the autumn Budget's energy bills package, which removes green levies and shaves 0.4 percentage points off CPI in Q2 2026, alongside reductions in administered prices and broader slowdowns in services inflation.

The Bank of England held its base rate at 3.75% in a tight 5-4 vote, but Governor Andrew Bailey signalled scope for cuts this year, with markets anticipating the next in March or April. Weaker labour market data, including slowing wage growth, supports an earlier easing, potentially as soon as spring.

Stalled Economy and CEO Pessimism

Compounding the downgrade, fresh data reveals Britain's economy unexpectedly stalled at the beginning of 2026, raising alarms over consumer spending and business investment. UK Finance's March review highlights net trade as a major drag, with imports outpacing exports and subtracting nearly a percentage point from growth—the largest since 2014.

Business sentiment reflects this downturn: 25% of UK CEOs now expect the economy to worsen in 2026, up from 13% last year. Caution persists in investment plans, hampered by economic uncertainty, cost pressures, and global trade risks from US tariff policies.

Fiscal Headroom Offers Slim Buffer

A record £30.4 billion budget surplus in January 2026, driven by robust tax receipts, has boosted fiscal headroom to £23.6 billion from £21.7 billion. While this eases debt sustainability concerns, experts caution it remains fragile amid domestic political turbulence and global headwinds.

Household spending grew modestly in 2025 for the first time since 2022, supported by government outlays and business investment, but services output flattened in Q4, with business-to-business sectors hit hardest. Productivity debates linger, with hopes pinned on AI and lower borrowing costs, though uptake remains uncertain.