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2026 started with rising geopolitical tensions, shifting trade policy and growing unease about AI’s impact on businesses. Global economic activity remained weak as uncertainty weighed on growth. Inflation continued to ease in the UK and the US, although the inflationary effects of the Middle East conflict had yet to appear in official data during the period. Consequently, central banks adopted a cautious tone, with the European Central Bank (ECB), the Bank of England (BoE) and the US Federal Reserve (Fed) all signalling a wait-and-see approach at their March meetings.
In the UK, economic growth remained subdued, expanding by 0.1% in Q4 2025, matching Q3’s weak pace, as services activity stagnated. The labour market remained subdued with the unemployment rate remaining at 5.2% in January.
Headline inflation eased, with the headline Consumer Price Index (CPI) falling to 3.0% in February, while core CPI (excluding food and energy prices) held at 3.2%. Despite weak growth and falling inflation in the UK, the BoE held rates at 3.75% and adopted a more hawkish tone amid concerns that Middle East tensions could reignite inflation.
In the euro area, economic growth slowed to 0.2% in Q4, slightly below expectations of 0.3%. Meanwhile, euro area inflation picked up to 2.5% in March, driven mainly by higher energy prices, while underlying pressures eased, with core inflation dropping to 2.3%. The ECB left rates unchanged at 2.0% and signalled caution on future cuts. US growth slowed sharply to 0.2% in Q4, which was down from 1.1% in Q3, as the government shutdown hurt economic activity. February’s unemployment held steady at 4.4% in February, while US inflation, as measured by the core PCE Price Index, rose slightly to 3.1% in January, reflecting persistent price pressures. The Fed kept rates unchanged in March as it balanced slowing growth against stubborn inflation.
