The UK's economic growth is projected to cool next year, as a softening jobs market and weak consumer confidence put a significant damper on household expenditure.
According to the latest economic outlook from professional services firm KPMG, the economy is set to slow to 1.0 per cent growth in 2026, down from an estimated 1.4 per cent in 2025.
Labour Market and Fiscal Squeeze
The forecast points to a weakening labour market as a key driver of this slowdown. Unemployment is predicted to rise to 5.2 per cent from the current 4.8 per cent. This reflects slower hiring by companies, partly due to increased employer costs stemming from last year’s hike in the national living wage and national insurance contributions.
Furthermore, wage growth is expected to tumble to 3 per cent by mid-2026, further tightening the squeeze on family finances.
The recent Autumn Budget delivered by Chancellor Rachel Reeves is also set to have a greater impact on household spending. Her decision to freeze income tax thresholds until 2031 is a significant factor. This £8.4bn 'stealth tax' is predicted to drag 4.8 million people into paying the higher rate, while an additional 600,000 will be pushed into the additional rate bracket.
Pockets of Strength and Future Outlook
Yael Selfin, chief economist at KPMG UK, commented on the subdued outlook. "The outlook for growth in 2026 is subdued, reflecting the impact of a cooling labour market and weak household spending," she said. "Although the Autumn Budget avoided front-loaded tax hikes, the decision to maintain frozen tax thresholds until 2031 means that fiscal drag will persist."
Despite the overall cooling trend, there are some emerging areas of strength. The UK's long-term underperformance in business investment compared to international peers may be partially offset by growth in the energy sector and digital infrastructure.
Selfin highlighted these positive signs, stating, "There are pockets of strength emerging in the form of data infrastructure and green energy investment. The medium-term picture could improve further if planning reforms unlock housing delivery and uncertainty reduces for investors."
This is reflected in the forecast for GDP growth to improve to 1.4 per cent in 2027, up from the 1.0 per cent estimated for 2026, driven by growing investment and the scaling up of infrastructure projects.
External Factors and Monetary Policy
External demand, however, is expected to offer limited support. A slowing US economy and the impact of higher tariffs are likely to weigh on both UK exports and imports, damaging overall trade.
On a more positive note, the Bank of England is widely anticipated to cut interest rates once more in December to 3.75 per cent, following slowing inflation and greater fiscal clarity from the government. Nevertheless, UK borrowing costs are predicted to remain elevated unless long-term spending pressures are properly addressed.
Easing inflation is also forecast over 2026, aided by measures in the Autumn Budget that will see household energy bills fall from April 2026.
