ECONOMY
Growth: Vulnerable to rising commodity prices
Recent monthly data may point to some near-term momentum, but the UK economy is entering a more difficult phase. The renewed energy shock is pushing up costs, extending supplier lead times and weighing on consumption, leaving growth prospects weaker than previously expected. Public spending is expected to support growth in 2026, but high government debt and rising borrowing costs severely limit how much fiscal stimulus is feasible.
Labour Market: Stabilising but fragile
The labour market is showing tentative signs of stabilisation, but it is materially weaker than it was before the last major energy crisis. Unemployment has edged lower, yet vacancies remain depressed and private sector employment indicators still point to softness. In turn, wage growth has cooled to around 3.2% y-o-y, the slowest growth since the immediate post-pandemic period.
Inflation: A temporary phenomenon?
UK inflation is climbing again as the energy shock drives up prices. Headline CPI rose to 3.3% in March, led by surging energy and fuel costs, and we expect further increases in the months ahead as higher oil and gas prices feed through. However, unlike the 2022 price spike, this rise is likely to be more moderate and temporary, with headline CLI potentially falling close to the Bank of England’s 2% target by end-2027.
Monetary policy: on hold, for now
The Bank of England’s policy stance has undergone a dramatic U-turn. Before the Iran conflict, markets were anticipating rate cuts, but renewed inflation pressures have forced a more hawkish outlook. Although the latest Monetary Policy Committee vote was 8-1 to keep rates unchanged, the door is open for further hikes. The BoE has signalled caution, aware that policy must balance a softer job market against the risk of entrenched inflation.
REAL ESTATE
Restrained and selective start to the year
After a strong finish to 2025, UK property investment has cooled in early 2026. January and February saw optimism thanks to lower interest rates, but March brought renewed caution as the energy crisis hit confidence. Q1 investment volumes dipped around 6% y-o-y, leaving activity 28% below the decade average. Still, there were pockets of resilience: office transactions in London and the key regional cities held up better than expected, and the living sector saw a slight uptick, boosted by a major student housing deal. Overall pricing remains broadly stable but is diverging by sector – for example, yields for top-tier offices have begun to sharpen in prime locations, even as logistics warehouse yields soften amid higher bond yields.
No sign of energy shock relief
With oil prices higher, the Strait of Hormuz still closed and UK borrowing costs rising sharply, investors are facing a tougher combination of weaker growth, higher inflation and tighter debt markets. This is already slowing deal flow and increasing pricing pressure in some parts of the market. While our base case expects investment activity to remain subdued through mid-2026, a moderate recovery is possible by Q4 if energy markets stabilise and borrowing costs ease. We do not anticipate a liquidity dislocation akin to 2020 or 2022/23; caution is high, but the market is adjusting rather than seizing up.
Leasing resilience to cushion the hit to liquidity
Bright spots in occupier demand are helping to offset weaker investor sentiment. Logistics supply has peaked and net absorption has turned positive, while in office leasing is softer but constrained by very low Grade A supply and limited development pipelines. These resilient leasing fundamentals are bolstering investor confidence, suggesting that better-quality assets with strong income growth potential will continue to find buyers even as financing remains tight.
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