UK GDP ended 2025 with quarterly growth of 0.1%. Consumer spending and industrial output lagged other countries, but forecasts from Nomura, the Bank of England and the wider consensus expect better growth from 2026 onwards.
Recent PMI readings are consistent with firmer activity if they continue, though the link between PMIs and UK GDP is not exact. More evidence is expected from the February surveys next week.
Bank Of England Growth Assumptions
The Bank of England forecasts average growth of 0.28% quarter-on-quarter in 2026, rising to 0.44% in 2027 and 0.47% in 2028. These projections depend in part on the saving ratio falling to about 8% in 2028 from 10% in 2025.
Lower savings would help consumption support growth, given the Bank’s central assumption of annual real post-tax labour income growth below 1%. A downside case in the Bank’s Monetary Policy Report is that the saving ratio stays high because households remain risk averse.
Even in the central forecast, the Bank expects the output gap to widen this year and remain negative through the forecast period. This supports its expectation that inflation will be at or below target from the second half of this year across its forecast horizon.
Following a weak end to 2025, where the UK economy barely grew, we are now looking at forecasts for a recovery. Recent business activity surveys, like the January PMI which came in at a seven-month high of 53.8, support this optimistic view for 2026. However, the foundation for this expected recovery is fragile.
Market Positioning Implications
The Bank of England’s entire growth forecast hinges on a key assumption: that households will lower their savings. The saving ratio, which was about 10% in 2025 according to recent ONS data, is predicted to fall towards 8%. Looking back at the post-pandemic period of 2022-2023, we saw households remain cautious for a long time, suggesting this drop in savings is a significant risk.
For interest rate traders, this creates an opportunity to position for potential disappointment. If consumer confidence falters and savings remain high, the Bank will be under pressure to cut rates later this year to stimulate growth. We should consider positioning in short-sterling or SONIA futures that would profit from a fall in expected interest rates.
This uncertainty also suggests a defensive stance in the equity markets. The FTSE 250 index, being more exposed to the domestic UK economy, is particularly vulnerable if consumer spending does not pick up as hoped. Buying put options on this index could serve as a valuable hedge or a directional bet against the Bank’s optimistic scenario.
Similarly, the British pound is at risk if the economy underperforms. A failure for growth to accelerate would likely weaken sterling against the dollar and the euro. We can use options to take a view, such as buying GBP/USD puts, which provide a low-cost way to profit if upcoming data points to continued economic weakness.
The immediate focus should be on next week’s February PMI data. This will be the first key indicator showing whether the early-year optimism is holding up. A weak reading would challenge the recovery narrative and suggest that positioning for a downside scenario is the prudent move.
