The UK economy expanded by 0.1% in the final quarter of 2025, confirming that the economy ended the year with positive, albeit modest, momentum. While the economy is growing, the pace of recovery remains limited after several years of subdued growth.

The composition of activity continues to matter. Services output provided the primary contribution to growth, supported by a gradual improvement in real household incomes. In contrast, production and construction activity remained relatively weak, reflecting cautious investment decisions, ongoing financing constraints and uncertainty around future demand. Consumer spending showed signs of stabilisation, but remained far from robust, particularly in interest-sensitive sectors.

Consumer confidence remains the key issue for the UK economy — ‘the consumer is king!’ While growth is slowly filtering through into the economy and inflation is gradually cooling, consumer confidence is failing to recover at a rate needed to drive up spending. The household savings ratio remains comfortably above pre-pandemic levels — hovering at or above 10% since mid-2024 — reflecting unease about the long-term trajectory of the economy.

Despite a modest improvement, consumer confidence today remains in negative territory and has done so for the past decade. According to OECD data, consumer confidence in the UK was higher throughout much of the 2010s, during the early 1990s recession, and even during the collapse of economic consensus in the late 1970s.

However, consumer confidence isn’t driven by intangible metrics like ‘GDP’ or ‘CPI’ — it’s driven by people’s everyday experiences. Despite what growth metrics may suggest, average living standards have not improved in the last decade. Unless there are clear signs that stagnant living standards will end, and unless public expectations shift and consumers’ animal spirits are reignited, a thriving economy remains more of a pipe dream than a reality.

Looking ahead to 2026, the growth outlook is marginally more constructive. Lower inflation, the prospect of gradual interest-rate reductions and improving real wages should support a modest pickup in activity over the year. However, political uncertainty is now an additional factor weighing on sentiment. While recent political turbulence is unlikely to have an immediate impact on economic fundamentals, it risks delaying investment decisions and weakening business confidence if it persists.

Although modest growth is anticipated in 2026, it will remain subdued until consumer confidence in the economy shifts to a higher gear.