Capital Economics warns that the UK consensus for 2026 may be too optimistic, identifying four key areas where their forecasts diverge. While the firm broadly agrees that GDP growth will slow to 1%, they predict a weaker consumer and a sharper drop in inflation than the market expects. The brokerage forecasts CPI inflation will hit the 2% target by April 2026 and fall to 1.8% by year-end, lower than the consensus view of 2.2%.

This disinflation, driven by a slowing economy, leads to their third divergence: Bank Rate falling to 3%, rather than the 3.5% priced by investors. Consequently, gilt yields are projected to drop to 4.25%. The final risk is political.

Capital Economics believes fiscal headroom will grow, but political pressures will likely push Chancellor Reeves toward higher public spending rather than tax hikes. If Prime Minister Starmer and Reeves survive local elections, looser fiscal policy is expected. However, a leadership change could cause a sharp spike in gilt yields.