Deutsche Bank’s Sanjay Raja says the British economy is approaching the Bank of England’s Scenario A, with higher-than-expected GDP in early 2026 but a cooling labor market and easing price pressures. GDP is estimated at around 1% in 2026-2027, while CPI is forecast slightly below Scenario A and potentially below the 2% target in the longer term.

Scenario Growth path and CPI

“The economy – at least on the surface – was stronger than the Bank expected. GDP growth at the beginning of the year was stronger than the Bank expected. However, the labor market softened slightly compared to the Bank’s expectations.”

“Compared to the MPC scenarios, we see that GDP growth will be closer to scenario A, with output being slightly more resilient due to stronger catch-up in Q1 2026. It appears that GDP growth in Q2 2026 is likely to be closer to 0.1-0.2% qoq. Annual GDP growth this year will be in line with the BoE staff projection of 0.9%, with growth likely to increase by 1%.

“Based on current market conditions, GDP growth this year is expected to slightly exceed all three of the Bank’s scenario projections. Taking into account the stronger Q1 2026 results, we would expect the Bank’s forecasts to increase to 1% under current market conditions (scenario A: 0.8%). We expect GDP growth in year 2 (2027) to also remain constant at 1% – broadly in line with the Bank’s scenarios A and B.”

“Based on current market conditions, we would expect CPI to remain slightly below the Bank’s projection in Scenario A. If we applied the same conditional assumptions to Scenario B, headline CPI would likely be 0.1 pp to 0.15 pp below the Bank’s forecasts over both the two- and three-year horizons, which would push headline CPI below the Bank’s 2% target.

“Based on current market prices and recent performance, the UK economic trajectory remains closest to the Bank’s Scenario A.”

(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor.)