The UK economy is expected to cool in 2026, as the softening labour market and subdued consumer confidence caused a drop in household spending.
The economy is set to slow 1.0 per cent next year, down from 1.4 per cent in 2025, according to the latest economic outlook from professional services firm KPMG.
Meanwhile, unemployment is forecast to rise to 5.2 per cent up from 4.8 per cent, reflecting slower hiring from companies due to increased employer costs caused by a hike in the national living wage and national insurance contributions in last year’s Budget.
Wage growth is also predicted to tumble 3 per cent by mid 2026, further constraining household spending.
2025 Budget
Rachel Reeves latest tax measures introduced in last week’s Budget is also expected to cause a greater impact on overall household spending.
In particular, her decision to freeze income tax thresholds until 2031, with the £8.4bn “stealth tax” predicted to drag 4.8m people into paying the higher rate, while 600,000 will pay the additional rate.
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
“Although the Autumn Budget avoided front-loaded tax hikes, the decision to maintain frozen tax thresholds until 2031 means that fiscal drag will persist.”
Economic outlook
While UK business investment has under performed in contrast to international peers over the last decade, growth in the energy sector and digital infrastructure is expected to buoy the economy.
Selfin said: “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.”
GDP growth is also forecast to improve to 1.4 per cent in 2027, up from 1.0 per cent estimated in 2026, off the back off growing investment and the scale up of infrastructure projects.
But, external demand is expected to offer limited support to the domestic economy, with the slowing US economy and higher tariffs weighing on both exports and imports and damaging overall trade.
The Bank of England is highly expected to cut rates once more in December to 3.75 per cent off the back of slowing inflation and greater fiscal clarity.
But, UK borrowing costs are predicted to remain high unless long-term spending pressures are addressed.
Easing inflation is also forecast over 2026, helped by other measures introduced in the Autumn Budget, including see household energy bills falling from April 2026.