The UK economy is expected to face another year of weak performance in 2026, with growth forecast to fall below 1%, according to new projections released ahead of the Chancellor’s Budget.
A further downgrade may come from the Office for Budget Responsibility (OBR). On Budget day, the OBR was anticipated to cut its estimate of the UK’s potential growth following a reassessment of productivity. Officials are expected to reduce assumed annual productivity gains by 0.3 percentage points, lowering projected tax revenues by around £21 billion over the remainder of the parliament.
This year’s stronger economic outturn has been boosted by a 3.7% rise in business investment. However, this rebound is not expected to continue, with investment growth forecast to slow sharply to 0.8% in 2026, removing a key pillar of support for output.
Labour market conditions are also weakening. Unemployment is forecast to peak at around 5% next summer. As slack builds, pay growth is expected to cool from recent highs, easing to around 3.5% by late 2025 and to roughly 3% by mid-2026.
Business sentiment is showing similar strain. The Institute of Directors reports a significant fall in confidence, with its optimism index dropping to a record low of -74 in September and edging only slightly higher to -73 in October. Many small and medium-sized enterprises say cost pressures have grown faster than revenues over the past year. Although those pressures are now beginning to ease, they continue to dampen hiring and investment plans.
While some recent forecasts suggest a marginally brighter outlook, businesses are being urged to plan on the basis that growth in 2026 will remain subdued, with tight investment conditions and a softer labour market posing ongoing challenges.
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