February 2026 Economic update: Mixed picture before the 2026 spring forecast

Recent economic news has been mixed. Inflation fell in January but there was modest economic growth in the last quarter of 2025 and unemployment is rising, especially among younger people.

This mixed picture is the backdrop for the Office for Budget Responsibility’s (OBR) spring 2026 forecast which will be published on 3 March. The Chancellor will respond in a statement in Parliament. This article looks at recent developments in economic growth, unemployment and inflation.

Economic growth was sluggish in the second half of 2025. According to initial estimates by the Office for National Statistics, the economy grew by 0.1% in the fourth quarter of 2025 (Q4 2025) in real terms. This was the same growth rate as in Q3 but lower than in Q1 and Q2, as shown in the chart below.

Source: ONS series IHYQ

The manufacturing sector grew by 0.9% in Q4 while services output was flat. Output in the construction sector fell by 2.1% in Q4, its largest fall since Q3 2021.

Household consumption, the largest component of GDP, grew by 0.2% in Q4. Business investment fell by 2.7% in Q4 but increased by 3.5% over 2025 as a whole. Exports fell by 0.6% while imports increased by 0.8% in Q4.

The economy grew by 1.3% in real terms in 2025 as a whole compared with 1.1% in 2024. Growth in 2025 was below the Office for Budget Responsibility’s forecast of 1.5%. The OBR forecasts growth of 1.4% in 2026 while the average independent forecast is for growth of 1.1%. The OBR will publish revised forecasts on 3 March.

Unemployment in the three months to December reached 1.9 million or 5.2%. This is the highest unemployment rate since late 2020 and 330,000 higher than a year ago.

Unemployment has increased across all age groups but has particularly affected younger workers: 739,000 of those aged 16 to 24 were unemployed, a rate of 16%. This is an increase of almost 100,000 on a year ago and the highest unemployment rate for this age group since 2015. By contrast, the unemployment rate for those aged over 25 is 3.6%.

Sources: ONS series YBVK, YBVQ, YCGP, YCGV, LF2E, K5HW

Various explanations have been suggested for the increase in unemployment including difficult global economic conditions, growing use of artificial intelligence and sluggish growth. Businesses have pointed to large increases in the national minimum wage for younger workers and higher national insurance contributions.

The National Minimum Wage for those aged 18 to 20 increased by 16.3% in April 2025 and a further 8.5% increase has been announced for April 2026. Labour’s manifesto pledged to equalise the minimum wage for those aged 18 to 20 with that for those aged 21 and over. There has been speculation that the government may slow this down. The Prime Minister has said that the government is sticking to its manifesto commitment.

UK inflation fell to 3.0% in the year to January, in line with economists’ expectations. This is its lowest level since March 2025 but above the Bank of England’s 2% target. The fall in inflation was driven by food, transport and non-alcoholic beverages.

There was a significant fall in the rate of food inflation to 3.5% over the year to January, down from 4.4% in the year to December and its lowest level since April. Food inflation had been 4% or more between May and December 2025.

Goods inflation was 1.6% in January while services inflation was 4.4%. Services inflation has been higher than that for goods over the past two years. The gap has narrowed as services inflation has fallen while goods inflation increased, as shown in the chart below.

Sources: ONS series D7NM, D7NN, D7G7

The Bank of England pays close attention to inflation in the services sector when setting interest rates, as this is regarded as less dependent on global factors and a more useful guide to domestic inflationary pressures.

The next meeting of the Bank of England’s Monetary Policy Committee, which sets interest rates, is on 19 March.