The UK economy is forecast to grow 1.3 per cent in 2026, according to the latest economic outlook from KPMG, despite mounting cost pressures in the second half of the year.
Household spending has been supported by warmer weather, while businesses have continued to invest in technology, helping to underpin growth through the first part of the year.
KPMG also estimates the economy will expand by 1.4 per cent in 2027, suggesting a modest but steady recovery trajectory over the medium term.
However, the outlook is expected to darken as the year progresses, with rising energy bills and slow wage growth set to squeeze household budgets considerably.
“Households’ spending power is likely to come under increasing pressure,” said Yael Selfin, chief economist at KPMG UK, pointing to a difficult period ahead for consumers.
Selfin also highlighted a deeper structural challenge, warning that “the longer-term challenge is how to sustain stronger growth as the contribution from a growing labour force diminishes.”
Higher wholesale gas prices are expected to filter through into household energy bills this autumn, with the ongoing conflict in Iran continuing to disrupt global energy markets.
The Ofgem energy price cap is forecast to rise by roughly four per cent in October, with the government’s reduction in VAT on household energy bills expected to only partially offset that increase.
The Bank of England is meanwhile anticipated to raise interest rates in the coming months, with the Monetary Policy Committee having opted to hold rates at 3.75 per cent last week, before a likely increase to 4 per cent at the November meeting.
The Chancellor faces a significant fiscal challenge ahead of the Autumn Budget, with rising borrowing costs linked to the Iran conflict having already reduced the £23.6bn of headroom recorded at the Spring Forecast by roughly £9bn.
Weak growth and an expected downgrade to OBR projections could reduce that headroom by a further £2bn, leaving the Chancellor with just £12bn to work with.
KPMG analysis also points to regional investment as a potential lever for improving long-term productivity, identifying England’s seven most underfunded regions, including the Midlands and the North East, as priority areas.
Selfin said: “Greater public investment has an important role to play in narrowing the UK’s longstanding regional economic divide, particularly where gaps in infrastructure are holding back productivity.”
She added: “The effectiveness of individual projects, alongside stronger private sector investment and credible local growth strategies, will be crucial in turning additional public spending into sustained improvements in productivity and living standards.”
The consultancy estimates that spending around £47bn of additional investment in those regions could bring them up to the current national average level of capital and yield £25bn in GDP over five years.