The UK economy is forecast to achieve 1.3 percent growth in 2026, with household spending benefiting from warmer conditions and continued business investment in technology, according to KPMG’s economic outlook. Growth is expected to moderate to 1.4 percent the following year as multiple economic pressures emerge.
Household consumption is anticipated to decelerate in the latter portion of the year as consumers face escalating energy expenses alongside stagnant wage growth. Rising wholesale gas prices are expected to flow through to residential energy bills beginning in autumn, with the Ofgem price cap estimated to increase approximately four percent in October. While government reductions in value-added tax on household energy are projected to provide some relief, the overall impact will constrain consumer spending power. The energy market pressures stem partly from geopolitical developments affecting global supply dynamics.
Monetary authorities are positioned to tighten financial conditions in response to these challenges. The Bank of England’s Monetary Policy Committee maintained interest rates at 3.75 percent at its recent meeting but is widely expected to raise the base rate to 4 percent at its November gathering. This tightening comes as policymakers address inflationary pressures arising from energy costs alongside labor market weakness and subdued domestic inflation.
The government faces budgetary constraints as it prepares its Autumn Budget. Rising borrowing costs attributed to geopolitical tensions have reduced fiscal flexibility significantly, with approximately £9 billion eliminated from previously available headroom. Potential economic downgrades could further shrink this margin to roughly £12 billion. KPMG analysis suggests that directing additional capital investment toward economically underfunded regions, particularly in the Midlands and North East, could narrow productivity disparities and support longer-term expansion. The consulting firm estimates that £47 billion in supplementary regional investment could bring lagging areas to national capital spending averages and generate £25 billion in economic output over five years.
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