Fresh economic forecasts paint a sobering picture for the UK economy, with growth expected to cool significantly next year as a weakening job market and cautious consumers dampen activity.
KPMG Predicts Subdued Growth and Rising Joblessness
In its latest Economic Outlook, the professional services firm KPMG has predicted that UK GDP growth will slow to just 1.0% in 2026, down from an anticipated 1.4% in 2025. This projection is notably weaker than the Office for Budget Responsibility's forecast last week, which anticipated a smaller dip to 1.4% in 2026.
The report also warns that the unemployment rate is set to climb to 5.2% in 2026, driven by slower hiring, increased workforce participation, and job cuts as companies turn to automation. Wage growth is expected to ease back towards 3% by mid-2026, a shift that could influence the Bank of England's decisions on interest rates.
Household Spending Under Pressure
Yael Selfin, Chief Economist at KPMG UK, attributed the subdued outlook to a cooling labour market and weak household spending. "With ongoing headwinds continuing to weigh on household activity, consumer spending is likely to remain subdued over the coming year," Selfin stated.
She also highlighted the impact of fiscal policy, noting that while the Autumn Budget avoided immediate tax hikes, the decision to maintain frozen tax thresholds until 2031 means the drag from 'fiscal drag' will persist, further squeezing incomes.
Business Surveys Signal Widespread Gloom
The downbeat assessment from KPMG is echoed by other key business surveys released recently. The Confederation of British Industry (CBI) reported that business sentiment and activity deteriorated further across the services sector in the last three months.
Its Service Sector Survey found business volumes dropped again, marking over a year of consecutive declines. Despite facing elevated costs, firms were unable to raise their selling prices, squeezing profit margins.
Adding to the pessimism, the Institute of Directors' (IoD) Economic Confidence Index remained at a record low of -73 in November. It saw only a marginal, temporary improvement immediately following the budget announcement.
Pockets of Strength and the Road Ahead
Amid the challenging forecast, KPMG identified some areas of potential growth, notably in data infrastructure and green energy investment. Selfin suggested the medium-term picture could brighten if planning reforms succeed in unlocking housing delivery and reducing uncertainty for investors.
The economic agenda for the day includes key data releases that will provide a more immediate health check, including UK manufacturing PMI and consumer credit figures.
