In a cautious outlook for Britain’s post-pandemic recovery, KPMG UK forecasts modest GDP growth of 1.2% in 2025, tapering to 1.1% in 2026, amid a cocktail of global uncertainties and domestic pressures.
This projection, detailed in the firm’s latest economic briefing released on September 23, 2025, underscores a resilient yet fragile economy navigating elevated tax burdens, sluggish productivity, and geopolitical trade frictions.
While early-year momentum from lower interest rates offers some uplift, persistent headwinds threaten to cap expansion, leaving policymakers with a delicate balancing act ahead of the Autumn Budget.
The report paints a picture of subdued optimism, with growth drivers tempered by structural challenges.
Positive tailwinds include the Bank of England‘s anticipated rate cuts, which could lower the base rate to 3.75% by the end of 2025 and further to 3.25% in 2026.
These reductions, alongside easing import costs from a stronger pound and softer oil prices, are expected to guide consumer price inflation back to the 2% target by mid-2026.
Infrastructure investments and a projected 1.9% rise in business investment this year also provide a foundation for cautious expansion.
Yet, as Yael Selfin, KPMG UK’s Chief Economist, notes,
“While the economy showed resilience at the start of the year, the second half looks more uncertain.”
Foremost among the headwinds is inflation’s stubborn streak. KPMG predicts a peak of 4% this autumn, fueled by soaring food prices, rising labour costs, and global supply disruptions.
Domestic services inflation remains particularly resilient, exacerbated by higher employer National Insurance contributions that will filter into consumer prices.
This inflationary pressure complicates the Bank of England’s path, with Selfin observing,
“With inflation set to remain above target in the near term, the Bank is likely to proceed cautiously. However, with growth slowing and labour market slack increasing, further easing looks likely.”
Weaker global trade adds to the strain, including a stark 21% year-on-year drop in UK exports to the US by mid-2025, driven by new American tariffs.
Consumer behavior reflects this caution, with household spending growth dipping below 1% in both 2025 and 2026.
Britons, burdened by high taxes and policy uncertainty, are expected to gradually draw down savings as rates fall, but elevated fiscal pressures—intensified by demands on health and defence budgets—limit any robust rebound.
Selfin warns that “elevated tax burdens, weaker global trade and cautious consumers are likely to keep growth subdued into 2026,” highlighting the risk of further tax hikes or spending restraints in November’s fiscal statement.
The labour market tells a similar story of softening dynamics.
Vacancies have plummeted 44% from their post-pandemic peaks, especially in manufacturing, retail, and hospitality, signaling deteriorating conditions.
Unemployment is projected to climb gradually to 4.9% by 2026, while wage growth moderates to 3.8% by late 2025 and stabilizes at 3% mid-year thereafter.
This slack could ease inflationary wage spirals but also underscores broader economic fragility.
Productivity woes compound these issues, with UK output per hour lagging pre-pandemic trends.
Alarmingly, intellectual property investment has fallen 6% since 2020, eroding innovation edges.
The adoption of artificial intelligence lags too: only 5.2% of UK firms deploy AI in production, versus 8.8% in the US, widening a competitiveness chasm that could stifle long-term growth.
Sectorally, the outlook is mixed.
Business investment’s uptick is a bright spot, but consumer-facing industries face headwinds from tepid spending and trade barriers.
The government’s fiscal tightrope is evident:
“Mounting pressures on health and defence spending, combined with weaker growth, mean difficult fiscal choices ahead,” Selfin cautions.
Recommendations implicit in the report urge bolstering innovation incentives and navigating trade pacts astutely to mitigate export risks.
Overall, KPMG’s forecast signals a UK economy in low gear, resilient against shocks but vulnerable to policy missteps.
With global tensions simmering and domestic reforms pending, 2025’s 1.2% growth may prove a hard-won achievement.
Businesses and households would do well to prepare for volatility, while policymakers eye rate relief and targeted investments to steer toward steadier horizons.