KPMG UK has released its latest European Economic Outlook, projecting a considerable slowdown in British economic expansion next year. GDP growth is anticipated to ease to 0.8% in 2026, down from an estimated 1.4% in 2025. This tempered outlook stems primarily from a fresh surge in global energy costs triggered by geopolitical tensions in the Middle East, particularly disruptions in the Strait of Hormuz linked to the Iran conflict.
According to the insights from KPMG, the renewed energy pressures are expected to ripple through the economy, driving up inflation and constraining household spending.
Higher costs could also prompt the Bank of England to consider additional monetary tightening, potentially as soon as July, to curb price rises.
This scenario highlights the UK‘s particular vulnerability, given that its wholesale electricity prices remain closely linked to gas, amplifying exposure to international fuel shocks.
Furthermore, softening labor market conditions may limit wage gains, making it harder for consumers to absorb rising prices.
Yael Selfin, Chief Economist at KPMG UK, emphasized the distinctive nature of this challenge compared to previous crises.
“The UK and Europe are once again confronting a major energy-related shock, but the nature of this crisis differs materially from the start of 2022,” she noted.
While direct gas supply risks are lower than during the Russia-Ukraine conflict, the wider fallout on global commodities and logistics networks could lead to more extensive economic consequences.
Across Europe, the picture is similarly cautious. KPMG anticipates Eurozone GDP to advance by 0.9% in 2026 and 1.2% in 2027, broadly in line with the UK‘s trajectory.
The continent as a whole is grappling with elevated energy bills and supply chain strains, yet outright recession is not the baseline expectation for most member states.
Resilient employment levels and sustained consumer demand are projected to provide a buffer, supporting domestic activity even as external headwinds intensify.
The disruption extends beyond energy. Elevated shipping expenses, alongside pricier inputs such as fertilizers, aluminium, and helium, are feeding into manufacturing and agricultural sectors.
Industries like automotive production, semiconductors, and defence are already feeling the pinch.
Tourism faces additional risks from potential jet fuel shortages, which could dampen summer travel and hit dependent economies including Greece, Portugal, and Croatia particularly hard.
Inflationary pressures are set to reaccelerate. In the Eurozone, average inflation is forecast at 3.1% for 2026, propelled by fuel costs and secondary effects on transport and goods.
The impact will differ by country: nations with greater gas reliance, such as Italy and Ireland, may see sharper rises, while others like Spain and Switzerland could experience more muted effects.
Despite these challenges, household consumption is expected to remain the main engine of growth.
Although real incomes are under strain and confidence has weakened, resilient job markets in many areas should help mitigate the blow to spending.
Central banks, including the ECB, may adopt a firmer stance, with possible rate hikes if pressures persist, creating a delicate policy balancing act.
Selfin added that the broad reach of affected commodities makes this episode potentially more pervasive than the 2022 shock, extending into industrial, agricultural, and service sectors.
KPMG also mentioned that the duration of the Strait of Hormuz disruption will be critical—if resolved relatively swiftly, damage could be contained.
KPMG’s analysis underscores a period of subdued growth and heightened uncertainty for the UK and Europe. Policymakers and businesses will need to navigate rising costs, supply constraints, and shifting monetary conditions carefully to maintain stability through 2026 and beyond. KPMG UK has now concluded that while risks are tilted to the downside, resilient fundamentals offer some grounds for measured optimism.