Fresh economic forecasts paint a subdued picture for the UK economy next year, with growth expected to slow and unemployment to rise as consumer spending remains weak.
KPMG Predicts Cooling Economy and Rising Joblessness
In its latest Economic Outlook, the professional services firm KPMG UK has predicted that the country's economic growth will cool significantly in 2026. The firm forecasts that UK GDP will rise by just 1.0% in 2026, down from an expected 1.4% in 2025.
This projection is notably weaker than the forecast from the government's official watchdog, the Office for Budget Responsibility (OBR), which last week predicted growth would fall to 1.4% in 2026 from 1.5% this year.
Alongside slower growth, KPMG anticipates a deteriorating labour market. The report predicts the unemployment rate will climb to 5.2% in 2026, driven by slower hiring, increasing workforce participation, and job cuts as companies invest in automation.
Wage growth is also expected to ease, falling towards 3% by the middle of 2026. This moderation in pay pressures could encourage the Bank of England to consider lowering interest rates.
Subdued Spending and Fiscal Drag Weigh on Outlook
Yael Selfin, chief economist at KPMG UK, explained the reasoning behind the downbeat forecast. "The outlook for growth in 2026 is subdued, reflecting the impact of a cooling labour market and weak household spending," she said.
Selfin did highlight some "pockets of strength," particularly in data infrastructure and green energy investment. She also suggested the medium-term picture could improve if planning reforms unlock housebuilding and reduce uncertainty for investors.
However, she pointed to persistent headwinds for consumers. "With ongoing headwinds continuing to weigh on household activity, consumer spending is likely to remain subdued over the coming year," Selfin noted. She added that while the Autumn Budget avoided immediate tax hikes, the decision to maintain frozen tax thresholds until 2031 means the stealth tax of "fiscal drag will persist."
Business Surveys Signal Widespread Weakness
The gloomy assessment from KPMG is echoed by other key business surveys released recently, indicating broad-based economic softness.
The Confederation of British Industry (CBI) reported that business sentiment and activity dropped further across the vital services sector in the last three months. Its latest Service Sector Survey found that business volumes fell again, marking over a year of consecutive declines.
Despite facing elevated cost growth, service firms left their average selling prices unchanged, suggesting they are unable to pass on higher costs to squeezed customers. Looking ahead, companies in the sector expect business volumes to keep falling over the next quarter.
Adding to the downbeat mood, the Institute of Directors (IoD) Directors' Economic Confidence Index remained at a record low of -73 in November, matching October's reading. It saw only a marginal, temporary improvement to -72 immediately after the budget announcement.
Economists and policymakers will now be closely watching a flurry of data for more clues on the economy's trajectory, including key reports on UK manufacturing, consumer credit, and mortgage approvals.
