EL7.AI
ForexMedium•28 October 2026•
4 min read

UK Growth Slows to 1.0% in 2027 as Energy and Interest Rates Weigh

Key Facts

1The Office for Budget Responsibility expects gross domestic product to grow 1.0% in 2027 and 1.2% in 2026.
2The OBR expects growth to accelerate to 1.6% in 2028 and 1.8% in 2029.
3The Bank of England held interest rates at 3.75% in September in a 6-to-3 vote, with the three dissenting members preferring a rise to 4%.
4Retail sales volumes fell 0.4% in September after rising 0.7% in August, and were up 0.8% year on year.

The UK Office for Budget Responsibility expects gross domestic product to grow 1.0% in 2027, after projected growth of 1.2% in 2026, according to the budget summary published by the Treasury on 28 October 2026. The new estimate points to a slowdown in activity between the two years, as households and businesses face rising energy costs and pressure from interest rates. The Treasury said the OBR expects growth to "slow to 1.0% in 2027" after raising its forecast for the current year to 1.2%. That represents a divergent path in the near and medium term, as the OBR does not expect the slowdown to continue beyond 2027. The forecasts form part of the economic and fiscal update accompanying the budget, not data on sterling's movements.

The budget summary attributed weaker projected growth in 2027 to the pass-through of higher energy prices to consumers and businesses, and to the pressure that higher interest rates place on the economy. This means higher energy costs affect not only household bills but also businesses through operating costs, according to the summary's explanation. The Bank of England also said in its explanation of the rate decision that the conflict in the Middle East disrupted energy transport and supplies and pushed up prices. The bank said supply disruptions increased fuel costs and household utility bills. This comes as the bank held interest rates at 3.75% in September, with price pressures still present.

The OBR does not project a sustained decline in growth; it expects it to accelerate to 1.6% in 2028 and then 1.8% in 2029. After that, it expects growth to moderate to 1.7% in 2030 and 1.6% in 2031. In one aspect of its assessment of productive capacity, the OBR raised its forecast for potential output growth in 2026 to 1.6%, up 0.3 percentage points from its March forecast. The Treasury linked the revision to strong output growth and business investment during the first half of the year. This path shows a temporary dip in growth in 2027, followed by an improvement in subsequent years, according to the OBR's estimates.

Retail data present a picture of monthly weakness alongside growth over a longer period: sales volumes fell 0.4% in September, after rising 0.7% in August, but remained 0.8% above their level in September 2025. On a quarterly basis, volumes rose 0.7% in the third quarter compared with the second quarter, and 1.5% compared with the same period in 2025. Online retailers attributed weak clothing sales to unusually warm weather, which affected sales of autumn and winter collections. The figures highlight the contrast between the latest month's decline and quarterly sales growth, rather than a uniform trend in consumer spending. The Office for National Statistics set 20 November 2026 as the date for the next retail data release.

The budget forecasts include inflation peaking at 3.8% in the first quarter of 2027, before returning to the 2% target by the third quarter of 2028. The Office for Budget Responsibility also expects unemployment to rise to 5.1% in the second quarter of 2027, then fall to 4.1% by the end of the forecast horizon in 2031. On investment, the Treasury said total investment rose 6.9% and business investment 7.5% from the start of the parliament through October 2026. By contrast, the ministry expects government debt interest payments to rise by an average of 14 billion pounds a year compared with the spring estimates. These estimates place the growth outlook in a broader context that includes inflation, unemployment, investment and the cost of servicing debt.

The Bank of England held interest rates at 3.75% in September, with 6 votes to 3, while the three dissenting members preferred a rise to 4%. The vote shows divisions within the Monetary Policy Committee over the decision, while the bank pointed to disruption to energy supplies and higher prices. One near-term date ahead of the next decision is the release of the October Decision Maker Panel survey on 30 October 2026; the survey includes indicators of businesses' price and inflation expectations. The bank set 5 November 2026 for its next Monetary Policy Committee meeting, with the meeting summary and minutes and the Monetary Policy Report due to be published. These official releases will provide updates on business indicators and the interest rate decision after the budget forecasts are issued.