Latest forecast point to a sharp slowdown in economic growth next year – but with inflation and interest rates also falling
The economy is forecast to slow next year, in a fresh challenge for Labour.
Professional services giant KPMG predicts the UK economy will grow by 1% in 2026, down from an expected 1.4% this year. It also expects unemployment to rise to 5.2% next year, and wage growth to drop back to around 3%.
In its update, KPMG also warned household spending would be hit by the extension of the freeze on income tax thresholds announced in the Budget.
Yael Selfin, chief economist at KPMG UK, said: “The outlook for growth in 2026 is subdued, reflecting the impact of a cooling labour market and weak household spending. But there are pockets of strength emerging in the form of data infrastructure and green energy investment.”
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While KPMG forecasts the economy will slow next year, it believes it will pick up again in 2027, with growth back to 1.4% as a number of actions announced by Labour begin to bear fruit. They include the scaling up of public infrastructure projects and as planning reforms begin to feed into an expected increase in house building.
But its forecasts point to consumer spending growing by just 0.8% this year, then 1% in 2026 and 1.1% in 2027. However, it also thinks inflation will fall from an average 3.4% this year, to 2.1% next year and then 1.8% – below the Bank of England’s 2% target.
The slowdown in inflation is expected to give the Bank the opportunity to cut interest rates.
But KPMG is not expecting rates to fall much over the coming years, in a blow to borrowers but a boost to savers. It forecasts the Bank’s base rate – currently 4% – will average 3.25% next year, and remain at around that in 2027. The Bank’s rate setting Monetary Policy Committee next meets on December 18, when economists think it opt for a cut to 3.75%.
It came as separate research from the Institute of Directors found business confidence remained at a near record low going into the Budget. A snap poll held directly afterwards showed it improved ever so slightly.
But drilling into the details of the post-Budget poll paints a more worrying outlook. For example, firms’ hiring intentions fell sharply, as did their investment and export plans.
Anna Leach, chief economist at the IoD, said: “Because this Budget landed midway through our fieldwork, we were able to track business leader confidence both immediately before and after the announcements. In the weeks running up to the Budget, persistent speculation over tax rises kept confidence subdued. And with our snap poll showing that four in five business leaders view the Budget negatively, it is no surprise that confidence remains close to record lows afterwards.”