This year, we are assured by the prime minister, will be one in which the UK “turns a corner” — by which he means that people will feel better off, and might even thank the government for it. You expect such messages, even platitudes, from Downing Street at the start of the year. If those at the top do not convey a bit of optimism, what hope is there for the rest of us?
So what chance is there of us turning a corner this year, and of this easing the pressure on our beleaguered prime minister and chancellor?
Sometimes neither of them can win. Digital ID cards were quite popular until Sir Keir Starmer put his weight behind them, after which polls showed that people were much less comfortable with the idea. If he announced three extra bank holidays, there would no doubt be whingeing about it, just as there has been some about the decision by the Scottish first minister John Swinney to award one to mark Scotland’s first World Cup participation since 1998.
Rachel Reeves was pilloried a few days ago for celebrating the FTSE 100’s rise above 10,000 for the first time. The criticisms were on the grounds that for the FTSE’s mainly global constituents, what happens in the world economy is a bigger influence than developments in the UK.
That seems harsh. The FTSE 100 was one of the best-performing major stock indices last year, easily outstripping the S&P 500, which Donald Trump is always bragging about. A stronger UK stock market, if not a specific policy aim, chimes with her determination to get more pension fund investment into UK equities and start-ups, and to increase the share of new listings obtained by London.
Chancellors get it in the neck when the stock market plunges, so why should they not celebrate when it rises? There are plenty of circumstances, directly related to the UK economy, when the UK’s main stock market index would have performed very differently. And if, as some say, Reeves has provided a hostage to fortune by celebrating the market’s rise, then if it does happen to slump, she can blame global factors. Politicians always do.
The main corner-turning prospect this year comes from inflation, on which the chancellor was right to concentrate in her budget by switching some of the energy price burden to general taxation. The November budget will lower inflation by about half a percentage point in April, according to the Bank of England, taking the rate down close to 2 per cent, the official target. Along with a general weakening of underlying pressures, this will bring down inflation. Eurozone inflation last week fell back to 2 per cent.
The American banking giant Goldman Sachs predicts that UK inflation will drop to 2.1 per cent in the April–June quarter, while ING Financial Markets, the Dutch-owned investment bank, says that “headline inflation will fall from 3.2 per cent today to 2 per cent from April, where we expect it to broadly remain for the rest of the year”.
It will not be a steady ride. Some economists fear that the next set of inflation figures, due on January 21, will show no improvement or a small rise from the past reading (for November) of 3.2 per cent. The big fall will be from April.
Falling inflation will help pave the way for two or three cuts in Bank rates this year — from 3.75 per cent now to a new norm of 3 or 3.25 per cent. Goldman Sachs thinks we will be at 3 per cent come September, while some others think 3.25 per cent will be the end point.
Politically, falling inflation should run alongside another net positive for the government. A drop in net migration is not necessarily good news for the economy or the public finances — in fact, the opposite — but it is probably a political necessity.
Largely because of the actions of the previous government, net migration in Labour’s first 12 months in office, to the middle of last year, fell to 204,000 — down from 649,000 over the previous 12 months. The trend is firmly downwards, and soon net migration will be down to the “tens of thousands” once unsuccessfully targeted by Tory prime ministers, if not below.
If the government can combine this with a meaningful reduction in small boat crossings, traditionally the very much smaller but more visible component of immigration, it will have a better story to sell to voters.
• Fraser Nelson: Keir Starmer’s lifeline is migration — will he grab it?
The problem, for both inflation and immigration, is that levels matter as well as rates of change. People are sceptical of official statistics, even “gold standard” statistics such as the consumer prices index, and with prices, it is the level of them — they have gone up a lot over the past few years — that they notice as much as the monthly change. Many people wrongly believe that falling inflation means falling prices, as I know from my mailbag.
Over time, however, low inflation does matter, even if it does not bring instant political results. Previously high inflation, even more than disappointing growth, condemned the Tories to a landslide defeat in 2024. America’s “affordability” crisis had a similar impact on the Democrats and is now responsible for a decline in Donald Trump’s approval rating, whatever he is doing internationally.
The ideal combination for the government, of course, would be falling inflation and stronger growth. It could happen, but the evidence from business surveys is that the economy has crawled, bleary-eyed, into 2026, and that sectors such as construction and hospitality are really down in the dumps, for which the latter blames the government.
I wrote a few weeks ago about the mythical “growth fairy”. We are still waiting for her to wave her magic wand.
PS
Thanks to everybody who entered my Christmas quiz, set three weeks ago, and there were indeed many entries, most with all the right answers, which are as follows:
1. How many times did the Bank of England cut interest rates in 2025? Four.
2. Which former Bank chief economist said the build-up to last month’s budget was a “circus”? Andy Haldane.
3. What did the Office for Budget Responsibility (OBR) revise down by 0.3 per cent a year? Forecast productivity growth.
4. Who was the OBR chairman who resigned over an inadvertent budget leak? Richard Hughes.
5. Donald Trump introduced new tariffs on imports. What is the “baseline” tariff on imports from the UK? (a) Zero (b) 10 per cent (c) 20 per cent? 10 per cent.
6. When the quiz was set, Rachel Reeves had been chancellor for 534 days. Where did that place her, in time in office, among chancellors since 2019? Third, behind Rishi Sunak and Jeremy Hunt.
7. The national living wage will rise to £12.71 an hour in April. By then, by how much will it have risen over ten years? (a) 37 per cent (b) 57 per cent (c) 77 per cent? 77 per cent.
8. A US economist famous for his curve visited Britain and offered unsolicited advice to Reeves. What is his name? Arthur Laffer.
9. The body responsible for monitoring and policing global trade celebrated its 30th anniversary in 2025. What is it? The World Trade Organisation.
10. UK taxes as a percentage of gross domestic product (GDP) — the tax burden — are estimated by the OBR to be 36.3 per cent this year, on their way to a record. By how much has the burden risen since 2019-20, before the impact of Covid? (a) 2 percentage points of GDP (b) 3.4 (c) 4.8? 3.4
So, who won? There were more entries than would fit comfortably into my new hat, so I used a random number generator to choose a winner. It is Enda McLernon of Northern Ireland, and a prize of books will be on its way to him. Congratulations!
Quite a few people have asked me about the annual forecasting league table that I used to do at this time of the year, reflecting on the forecasting successes and failures of the previous year. I stopped doing it a couple of years ago for one or two reasons.
The first was that the pandemic produced such wild swings in economic activity that the normal rules of forecasting went out the window. This was particularly true of predictions made in January 2020, when most people were unaware of Covid and forecasts were very much business as usual, but it also applied over the following two to three years.
The other reason was that too many forecasters questioned the referee’s decisions, either because their predictions were not included in the Treasury’s monthly compilation of independent forecasts, which was my source, or because of something else, which became rather tiresome. Should I reintroduce it? Let me know what you think.
david.smith@sunday-times.co.uk