London's Economy Today editorial - October 2026

Chancellor's first Budget offers energy bill support and begins fiscal devolution to mayors

Shaped by the energy price shock from the Middle East conflict and ever-higher government borrowing costs, the first Budget from John Healey, the new Chancellor of the Exchequer, offers support for household energy bills, maintains fiscal headroom, and raises £6.6 billion a year by 2030-31 through targeted tax measures.

In its accompanying Economic and Fiscal Outlook, the Office for Budget Responsibility (OBR) forecasts GDP growth of 1.2% in 2026, 1.0% in 2027 and 1.6% in 2028 – compared with 1.1%, 1.6% and 1.6% respectively in its March forecast. The Chancellor is still forecast to meet the fiscal rules with £14.5 billion of headroom, £7 billion less than forecast at last year's Budget – with much of this squeeze a result of rising debt interest from higher gilt yields. The OBR forecasts the tax burden passing its previous historical high in 2027-28 and peaking at 38.6% of GDP, with borrowing falling from 4.2% of GDP this year to 1.8% by 2030-31.

For London, arguably the most significant development is the Fiscal Devolution Roadmap, which the government describes as “the biggest fiscal devolution in a generation”. Mayors will receive a share of business rates from April 2027 and of basic-rate income tax from 2028-29. With London contributing 25.9% of UK income tax from only roughly 13% of the population, how baselines and equalisation are set will decide how far the capital shares in its own growth. The Budget also gives the GLA new ways to fund transport, including business rates retention zones at Euston and Stratford and a successor to the Elizabeth line Business Rates Supplement. Key details for London such as its income tax baseline, business rates arrangement and share of the new Good Growth Funds are still to be settled, due at the 2027 Spending Review.  

GLA Economics will examine the London-specific impacts in more detail in next month's edition of London's Economy Today.

UK economic growth picked up in August driven by services

The Budget was delivered against a backdrop of continued economic growth with the latest data from the Office for National Statistics (ONS) showing that the UK economy grew by 0.7% in the three months to August 2026. This was faster than the upwardly revised 0.5% growth seen in the three months to July and marked the eighth consecutive three-month period in which the economy expanded (Figure 1).

In the three months to August output in the services sector, an important sector of London’s economy, grew by 0.9% and drove overall GDP growth. By contrast output in the construction and production sectors fell by 1.0% and 0.2% respectively. These sectors thus subtracted 0.05 percentage points (pp) and 0.02pp respectively from overall growth while services added 0.75pp. Within services, the strongest growth came from professional, scientific and technical activities (2.8%), information and communication (2.8%), and administrative and support services (3.0%). Compared with the same period a year earlier, real GDP was 1.8% higher.

On a monthly basis, GDP increased by 0.1% in August, following growth of 0.4% in both June and July. This growth rate was higher than the 0.1% contraction expected by polled analysts. Only production saw growth in August growing by 0.8% while services saw no growth and construction saw a contraction of 0.2%.

UK inflation continues to rise in September

Despite the stronger than expected growth in output the latest Consumer Price Index (CPI) inflation data from the ONS showed that CPI inflation rose to 3.5% in the 12 months to September 2026, up from 3.1% in August (Figure 2). This is the highest inflation has been since October last year. CPIH inflation, which includes owner occupiers' housing costs, also increased, from 3.3% to 3.6%. On a monthly basis, both CPI and CPIH rose by 0.4% in September 2026, compared with 0.0% for CPI and 0.1% for CPIH in September 2025.

The ONS reports that “transport, particularly motor fuels, made the largest upward contribution to the monthly change in both CPIH and CPI annual rates; restaurants and hotels made the largest, partially offsetting, downward contribution”. While, compared to other major European economies the UK’s CPI rate “was higher than the inflation rates of France (3.4%) and Germany (3.3%) in September 2026”.

Core CPI increased from 2.6% in August to 2.8% in September. Services inflation also increased from 2.4% in August to 3.7% in September and remained above goods inflation, which rose from 2.7% to 3.2%, highlighting persistent domestic price pressures.

IMF upgrades UK growth forecast amid a fragile global outlook

Looking forward the International Monetary Fund (IMF) has raised its forecast for UK economic growth in 2026, following the stronger than expected economic performance in the first half of the year. However, higher energy prices and borrowing costs continue to weigh on the outlook.

In its October World Economic Outlook, the IMF revised its UK growth forecast for 2026 to 1.3%, up from 1.0% in July and 0.8% in April. UK GDP grew by 0.6% in the first quarter and 0.5% in the second. However, growth is expected to slow to 1.2% in 2027, as the effects of higher energy prices and borrowing costs increasingly weigh on household spending and business investment.

Inflation remains a concern. UK consumer price inflation is forecast to average 3.3% in 2026 and 2.8% in 2027, remaining above the Bank of England's 2% target.

Globally, the IMF expects economic growth to slow to 3.1% in 2026, before recovering to 3.4% in 2027. The outlook remains uneven, with countries benefiting from AI-related investment and trade performing relatively well, while energy-importing economies outside the technology supply chain face greater challenges.

The IMF warned that further geopolitical tensions, renewed trade disputes, a reassessment of AI investment expectations and fiscal vulnerabilities could undermine global growth. It emphasised the need for governments to rebuild fiscal buffers while supporting long-term productivity.

Global bond yields ease from multi-decade highs, but UK borrowing costs remain the highest among major economies

Government bond prices fell across the major economies in September and early October, pushing yields, which move inversely to prices, to multi-decade highs. Higher yields raise the cost of new borrowing for governments, and feed through to the rates households and businesses pay on mortgages and loans. Bank of England data showed that the yield on ten-year UK government bonds (gilts) peaked at 5.4% in early October, its highest level since 2007, before easing slightly to 5.3% by late October. US, Japanese, and German ten-year yields also hit multi-decade highs and have also eased slightly.  

The Bank of England's Financial Policy Committee linked the rise to higher oil and gas prices following the re-escalation of the Middle East conflict, saying it reflected "both higher interest rate expectations and an increase in term premia", the extra return investors demand for holding longer-dated debt.

Higher yields mean more expensive borrowing for households and public bodies. Fixed mortgage rates move closely with gilt yields, and Bank of England data showed that the average quoted rate on a five-year fixed mortgage for borrowers with a 25% deposit rose to 5% in September, the highest rate since October 2023. Rates at the Public Works Loan Board, which lends to councils and other public bodies, are also set at a margin over gilt yields. London boroughs owe almost £20 billion to the board, and new borrowing now costs well above the 3.6% average rate on TfL’s £14 billion of debt.

Operating costs rising at London firms

The London Chamber of Commerce and Industry (LCCI) published their Q3 Quarterly Economic Survey 2026 this month. This found that “high operating costs remained widespread in Q3, with only limited easing. More than half of London businesses reported increases in fuel costs (55%) and energy costs (51%)”. However, “a quarter (25%) expected their prices to rise over the following three months, down from 34% in Q2, reducing the balance by 9 points to +17”. Still “most London businesses maintained their workforce in Q3, but reductions were more common than expansion. Employment remained unchanged for 83%, while 12% reported a decrease and only 5% an increase”. However recruitment activity remained limited with “only 10% of London businesses attempt[ing] to recruit, unchanged from Q2. Activity was heavily concentrated among larger businesses: 60% tried to recruit, up from 48% in Q2”.

Elsewhere the latest labour market data from the ONS suggests that labour market conditions in London remain subdued. The data showed in the three months to August London’s unemployment rate increased although economic inactivity decreased. The unemployment rate was estimated at 6.6%, an increase on the quarter and an increase of 0.5pp from a year earlier. The UK average was 4.7%. And London’s inactivity rate (the measure of those not looking and/or not available to work) was estimated at 20.1%. This was a decrease of 0.2pp on the previous year, and a decrease on the quarter. It is lower than the UK-wide estimate of 20.9%.

GLA Economics will continue to monitor these (and other) aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.