In a note released Tuesday, the bank predicts GDP growth of 1.3% for the year and 1.4% for 2026, down two-tenths below its previous forecasts, respectively. Weaker private sector demand, higher payroll costs, and subdued employment growth are cited as key factors shaping this outlook.
“Looser fiscal policy will likely subtract from private sector spending. Weaker private demand and higher payroll costs will likely lead to lower employment growth and wage settlements. Higher prices – though temporary – are likely,” Deutsche Bank senior economist Sanjay Raja said in a note.
The UK labor market is expected to soften further. Deutsche anticipates the unemployment rate will peak at 4.6% by late spring, driven by falling job vacancies and rising employer costs due to increased National Insurance Contributions (NICs). Wage growth is projected to moderate, with average pay settlements slowing to 3.75%-4% in 2025 and to 3-3.25% in 2026, down from 5.5% in 2024.
Deutsche also expects inflationary pressures to persist, with headline CPI climbing to 2.9% in 2026, up from 2.5% in 2024.
“A painful one-off bump higher in price momentum is likely in our view, given higher energy prices, administrative tax changes, and the hike in employer National Insurance Contributions (NICs),” Raja wrote.
The report maintains that inflation will return to the Bank of England’s 2% target by 2026.
Moreover, Deutsche Bank projects that the UK’s fiscal policy will remain constrained, leading to reduced medium-term spending plans, as outlined in the Chancellor’s upcoming Spring Statement. However, delays in the multi-year spending review could result in increased borrowing or potentially minor tax adjustments.
On the monetary policy front, the bank expects a slower pace of easing, with the Bank of England cutting rates four times instead of five in 2025. The first rate cut is anticipated in the first half of the year, with further reductions concentrated in the latter half. Deutsche Bank maintains its forecast for the Bank Rate to reach 3.25% by the first quarter of 2026.
“We continue to see Bank Rate at 3.25% in Q1-26. Risks are skewed to a slower easing cycle, and higher terminal rate,” the report states.
Meanwhile, house prices are forecast to grow by 2.75% in 2025, supported by favorable credit conditions and steady consumer demand. On the other hand, trade faces headwinds from global uncertainties, including potential tariff escalations under the US’s newly elected administration.
Source: Economy - investing.com
