As 2025 draws to a close with a record of stalling growth and fragile markets, economists are identifying several grounds for cautious optimism for the UK economy in the new year. From a potential consumer rebound to tentative productivity gains, the pervasive gloom could begin to lift.
Fiscal Calm and a Boost in Business Confidence
The first cause for hope is the prospect of a quieter fiscal year. Chancellor Rachel Reeves significantly increased her headroom against fiscal rules in November's budget, aiming to avoid a repeat of 2025's protracted tax speculation. Her spring statement is set to be a 'non-event', as the Office for Budget Responsibility will not formally assess her against the rules, allowing policy to stand firm until autumn barring major upheaval.
This newfound stability appears to be filtering through to businesses. While official data showed an unexpected economic contraction in October, more recent forward-looking surveys suggest a shift. The flash Purchasing Managers' Index (PMI) for December rose to 52.1, indicating growth. S&P Global reported the strongest rise in new business for 14 months, particularly within services.
Neil Carberry, Chief Executive of the Recruitment and Employment Confederation, notes a tangible change in sentiment. "There was a general sense that things got quite a lot better from the first week of September," he said, adding that many are "hopeful about what comes through in January and February."
Consumers Poised to Loosen Purse Strings?
A third, closely-watched reason for optimism centres on the UK consumer. A combination of the latest Bank of England interest rate cut, the government's energy bill relief package, and the end of uncertain tax debates could spur household spending.
Analysts point to a significant buffer that could facilitate this: the household savings rate. In Q2 2025, it stood at 10.7%, roughly 2.5 percentage points above the long-term average. Former Bank of England rate-setter Michael Saunders suggests this stockpile, partly built due to post-pandemic financial insecurity, indicates a latent capacity to spend if confidence returns.
While the Bank may be reluctant to cut rates aggressively further, and Saunders warns high saving could cap growth, the potential for a consumer-led recovery remains a key hope for 2026.
The Tentative Dawn of a Productivity Revival
The fourth and perhaps most significant reason for hope is emerging data on productivity. Output per worker grew by 1% in the first half of 2025, putting it on track for one of its best years since the 2008 financial crisis.
Andrew Wishart of Berenberg Bank called this "the good news story of the year." While some gains are mathematically linked to job cuts in labour-intensive sectors after changes to employer National Insurance, Wishart's analysis suggests genuine improvements in areas like IT. He posits, "We could plausibly be witnessing the beginnings of a boost from artificial intelligence."
This aligns with the underlying aim of policies like raising the minimum wage and employer NICs: to incentivise businesses to invest in technology and innovation over relying on cheap labour, a shift long advocated by economists like the LSE's John Van Reenen.
With wage inflation showing signs of easing, potentially allowing for more interest rate cuts, the conditions for a productivity-driven recovery could be falling into place. While challenges persist, these four factors offer a glimmer of festive cheer for the UK's economic prospects in 2026.
