The upcoming year is expected to see a slowdown in the economy, posing a new challenge for the Labour party. Leading professional services firm KPMG has projected a growth rate of 1% for the UK economy in 2026, which is a decrease from the anticipated 1.4% growth rate for the current year. Additionally, KPMG forecasts a rise in unemployment to 5.2% next year, with wage growth expected to decline to around 3%.
KPMG’s latest update also cautions that household spending will be impacted by the extension of the freeze on income tax thresholds as announced in the recent Budget. Yael Selfin, the chief economist at KPMG UK, highlighted that the growth outlook for 2026 is modest due to a cooling labor market and subdued household spending. However, there are signs of strength emerging, particularly in data infrastructure and investments in green energy.
Despite the projected economic slowdown in the coming year, KPMG remains optimistic about a rebound in 2027, with growth expected to reach 1.4% as a result of various initiatives announced by the Labour party. These initiatives include the expansion of public infrastructure projects and anticipated growth in house building due to planning reforms.
Consumer spending is predicted to increase by 0.8% this year, followed by 1% in 2026 and 1.1% in 2027. On the other hand, inflation is forecasted to decrease from an average of 3.4% this year to 2.1% in 2026 and further down to 1.8% – below the Bank of England’s target of 2%.
The anticipated decline in inflation is expected to provide an opportunity for the Bank of England to reduce interest rates. However, KPMG does not foresee a significant drop in interest rates over the next few years. The firm projects that the Bank’s base rate, currently at 4%, will average around 3.25% next year and remain stable at that level in 2027. The Bank’s Monetary Policy Committee is scheduled to convene on December 18, with expectations of a rate cut to 3.75%.
Meanwhile, a study by the Institute of Directors revealed that business confidence remained low leading up to the Budget, with only a slight improvement post-Budget. The post-Budget poll indicated a concerning outlook, showing a sharp decline in firms’ hiring intentions, investment plans, and export strategies.
Anna Leach, chief economist at the IoD, described how persistent rumors of tax increases prior to the Budget kept business confidence restrained. The snap poll conducted after the Budget revealed that four out of five business leaders viewed the Budget negatively, contributing to the ongoing low confidence levels.
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