The upcoming year is expected to see a slowdown in the economy, presenting a new challenge for the Labour Party. According to KPMG, a leading professional services firm, the UK economy is projected to grow by 1% in 2026, a decrease from the anticipated 1.4% growth this year. KPMG also forecasts a rise in unemployment to 5.2% next year, coupled with a decline in wage growth to approximately 3%.
In its latest update, KPMG cautioned that household spending could be impacted by the extension of the freeze on income tax thresholds as outlined in the Budget. Yael Selfin, KPMG UK’s chief economist, noted that the growth outlook for 2026 is subdued due to a cooling labor market and weakened household spending. However, there are signs of strength emerging in areas such as data infrastructure and investments in green energy.
While KPMG predicts a slowdown in the economy next year, it anticipates a rebound in 2027 with growth returning to 1.4%. This optimism is based on various measures announced by the Labour Party, including the expansion of public infrastructure projects and anticipated increases in house building resulting from planning reforms.
Consumer spending is expected to show modest growth, with a 0.8% increase this year, followed by 1% in 2026 and 1.1% in 2027. Inflation is projected to decline from an average of 3.4% this year to 2.1% next year and further to 1.8% – below the Bank of England’s 2% target.
The anticipated decrease in inflation is likely to provide the Bank of England with an opportunity to reduce interest rates. Despite this, KPMG does not foresee significant interest rate cuts in the coming years, projecting the Bank’s base rate to average 3.25% next year and remain around that level in 2027.
Recent research by the Institute of Directors revealed that business confidence remained at a near record low leading up to the Budget, with a slight improvement observed post-Budget. However, a deeper analysis of the post-Budget poll shows a concerning outlook, with notable declines in firms’ hiring intentions, investment plans, and export strategies.
Anna Leach, the IoD’s chief economist, highlighted that ongoing speculation regarding tax increases prior to the Budget had kept business confidence subdued. Following the Budget, the majority of business leaders viewed the announcements negatively, contributing to the persistently low confidence levels.