The United Kingdom’s economic recovery is poised to face notable obstacles next year, driven largely by climbing energy prices and a worsening inflation outlook, according to KPMG UK’s latest Economic Outlook. The advisory firm now forecasts gross domestic product growth slowing sharply to 0.7 percent in 2026, down from an expected 1.3 percent this year.
Geopolitical tensions in the Middle East have disrupted energy supplies, creating a fresh shock that is expected to lift wholesale costs and feed through to consumers.
Domestic households are likely to see utility bills rise in the third quarter of 2026 once the current Ofgem price cap ends in April.
This pressure will weigh on spending power and push the central bank to keep borrowing costs elevated for longer than previously anticipated.
Yael Selfin, chief economist at KPMG UK, pointed out that the 2026 growth picture has been dented by higher energy expenses, a cooling jobs market, and muted household demand.
Businesses are expected to rein in investment plans amid these uncertainties, while families may trim non-essential purchases to absorb the added cost-of-living strain.
With prices set to climb again from mid-year, the Bank of England is unlikely to cut rates aggressively, leaving households and firms facing higher financing costs even as activity moderates.
Headline inflation is now projected to accelerate in the second half of the year and could peak at 3.6 percent in September 2026.
That would leave it well above the Bank of England’s 2 percent target for much of the period.
Companies will feel the pinch first through rising input costs, raising the risk that these are passed on to shoppers and generate further price spirals.
On monetary policy, KPMG expects the Bank of England to tread carefully. Only one rate cut is foreseen for 2026, with additional reductions now likely delayed until 2027.
Policymakers must weigh persistent inflation risks against a weakening labour market and sluggish expansion.
Fiscal pressures are also building for the government.
Although the recent Spring Budget provided some stability, slower growth and higher interest rates are set to erode budget headroom later in the year.
Any support package to shield households from energy price rises could cost up to £5 billion in 2026.
At the same time, commitments to lift defence spending to 3 percent of GDP by the end of the decade may force difficult choices, including potential reductions elsewhere in public investment.
Consumer spending, a key engine of growth, is forecast to expand by just 0.7 percent in 2026, easing from 1 percent this year.
Since the pandemic, UK household consumption has risen by only 1.4 percent, lagging far behind nearly 20 percent gains in the United States and 5 percent across the euro area.
Repeated shocks have clearly limited British families’ ability and willingness to spend.
Taken together, the updated forecasts paint a picture of an economy navigating renewed external pressures. While domestic resilience remains, the combination of higher energy bills, sticky inflation, and cautious policymaking will test the UK’s path to stronger, more balanced growth in the year ahead.