Key facts
- The UK economy is forecast to grow 1.3% in 2026 and 1.4% in 2027, according to KPMG.
- Rising energy bills and higher borrowing costs are expected to weigh on economic activity in the second half of the year.
- Higher wholesale gas prices are expected to increase household energy bills and inflation.
- The Ofgem energy price cap is forecast to rise by approximately 4% in October.
- The Bank of England is expected to raise interest rates to 4% in November.
- Additional investment in underfunded regions could close the productivity gap and support growth.
The UK economy is projected to experience growth in 2026, with KPMG forecasting a 1.3% expansion, followed by 1.4% growth in 2027. This outlook is supported by household spending, buoyed by warmer weather, and continued business investment in technology.
However, the latter half of the year is expected to see a slowdown as households grapple with rising energy bills and stagnant wage growth, according to KPMG's latest economic outlook. Yael Selfin, chief economist at KPMG UK, noted that households' spending power is likely to come under increasing pressure, highlighting a long-term challenge of sustaining growth as the labor force expansion diminishes.
Inflationary pressures are mounting due to higher wholesale gas prices, which are anticipated to translate into increased household energy bills this autumn. The Ofgem energy price cap is forecast to rise by approximately 4% in October, with the government's reduction in VAT on household energy bills expected to offer only partial relief.
In response to these pressures, the Bank of England is anticipated to raise interest rates from the current 3.75% to 4% at its November meeting, aiming to combat higher energy prices, a weaker labor market, and subdued domestic inflation. The Chancellor, John Healey, faces a constrained fiscal environment for the upcoming Autumn Budget, with reduced headroom for significant support measures.
KPMG analysis also suggests that increased capital spending in the UK's seven most underfunded regions could help narrow the productivity gap and foster stronger long-term growth. An estimated £47 billion in additional investment could bring these regions up to the national average capital level, potentially yielding £25 billion in GDP over five years.