The upcoming year is anticipated to see a deceleration in economic growth, posing a new obstacle for the Labour party. According to projections by KPMG, the UK economy is set to expand by 1% in 2026, a decrease from the expected 1.4% growth this year. Additionally, KPMG foresees a rise in unemployment to 5.2% next year and a decline in wage growth to approximately 3%.

KPMG’s latest update also cautions that the extension of the freeze on income tax thresholds announced in the Budget will impact household spending. Yael Selfin, the chief economist at KPMG UK, remarked on the subdued growth outlook for 2026, attributing it to a cooling labor market and sluggish household spending. Despite this, Selfin highlighted emerging strengths in 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% as Labour’s initiatives, such as expanding public infrastructure projects and implementing planning reforms to boost house construction, come into effect. Consumer spending is expected to grow by 0.8% this year, followed by 1% in 2026 and 1.1% in 2027. Inflation is projected to decrease 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 decline in inflation is likely to provide the Bank with the opportunity to reduce interest rates. However, KPMG does not foresee significant rate cuts in the upcoming years. The forecast suggests that the Bank’s base rate, currently at 4%, will average 3.25% next year and remain around that level in 2027. The Monetary Policy Committee of the Bank is expected to convene on December 18, with speculations of a cut to 3.75%.

Meanwhile, a study by the Institute of Directors revealed that business confidence remained at a near-record low leading up to the Budget. A post-Budget poll indicated a slight improvement in confidence, but a closer analysis showed a concerning reduction in firms’ hiring intentions, investment plans, and export strategies.

Anna Leach, the chief economist at the Institute of Directors, highlighted the impact of the Budget on business leader confidence, noting that persistent speculation about tax increases dampened confidence levels. The snap poll results, with four out of five business leaders viewing the Budget negatively, explain the lingering low confidence levels post-Budget.