2026 UK country risks: Fading policy boosts ahead

The Allianz Trade Economic Research team has given the UK a Country Risk Rating of AA1: low risk for enterprises. This rating measures the risk of non-payment by companies in a given country. This risk is due to conditions or events outside any company’s control. You can find the full methodology by downloading the PDF report at the end of this article.

UK growth is expected to cool in 2026 as growth-boosting one-offs fade. In 2025, growth was supported by strong business and residential investment ahead of expected tax hikes. Rapid wage growth, fuelled by government policies, also helped to power consumer spending. But most of these mostly policy-driven factors will fade through 2026. Fiscal policy has become more predictable following the 2025 Autumn Budget, with no major changes in legislation announced for 2026. Both residential and business investment are set to normalise, though public infrastructure spending should keep solid momentum. We remain more positive on consumer spending, though, thanks to easing inflation. GDP growth should pick up slightly in 2027, supported by past monetary easing, though the economy has little spare capacity to grow much faster than +1.5%.

Overall, business insolvencies have broadly stabilised since 2024 but at an elevated level. Insolvencies in construction and hospitality have declined. We expect a sustained decline in overall insolvencies through 2027, thanks to looser monetary and financial conditions, as well as easing wage and prices pressures. Nevertheless, insolvencies are expected to remain above pre-pandemic (2012-2019) averages.

The UK scores poorly in terms of public and external balances. The gross public debt-to-GDP ratio now stands at around 100%, versus 85% in 2019 before the Covid-19 crisis. The government has committed to strong fiscal discipline, but most of its fiscal tightening plans are set to take effect after 2027, which undermine their credibility. As a result, financial markets are watching closely for any signs of fiscal slippage of fading fiscal discipline. This keeps borrowing costs elevated for both the public sector and the private sector, particularly mortgage rates. We expect the public debt-to-GDP ratio to continue to rise, though slowly, through 2027 at least.

On the external front, the UK has weak fundamentals. It has run a substantial current account deficit for many years now. Strong services exports are not nearly enough to offset worsening goods export performance. High inflation in particular has led to a substantial appreciation of the GBP real exchange rate, weighing on export performance. Meanwhile, Brexit has increased trade frictions with the EU, the UK’s main trading partner. The government is pushing through trade deals with new regions and gradually easing trade barriers with the EU (on food standards most recently), which are welcome developments. However, structural weaknesses (inflation overshoots, low productivity) are strong impediments to much improved fundamentals.

The UK scores relatively well in terms of economic freedom, ranking 33rd in the Economic Freedom Index. The country is well placed in terms of property rights enforcement, business, trade and financial freedom and judicial effectiveness. Weaknesses include fiscal health, high government spending crowding out private business activity and rising taxation. The government’s initiatives to ease the planning regime (a strong constraint to new construction) and shore up the healthcare system are steps in the right direction. However, increased taxation on businesses – with the recent increase of employers’ National Insurance contributions (payroll taxes) – are a negative pushing in the other direction.

In terms of governance, the UK scores high on regulatory quality, rule of law and control of corruption, confirming its strong position as a place to do business. However, on sustainability the UK is lagging behind many peer countries in terms of energy use per GDP, renewable electricity production and recycling rate.

The government has lost favour in public opinion since it was elected in July 2024. Within the Labour Party, divisions have grown, particularly over the conduct of economic and social policy. Many Labour MPs pushed back against the government’s plan to reduce the generosity of some social benefits in an attempt to make new savings. The government mostly yielded to these demands, but the Prime Minister and the Chancellor of the Exchequer remain vulnerable to internal rebellion. A new team, if elected within the Labour party, would likely place less emphasis on fiscal discipline, increasing the UK’s exposure to negative financial market reactions.