UK Growth Forecast 1.3% Clouded by Energy Costs

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KPMG projects the UK economy to expand 1.3 per cent in 2026, after household spending was buoyed by milder weather and firms continued to invest in technology.

Rising energy bills and higher borrowing costs are expected to dampen activity in the second half of the year, according to the same outlook. “Households’ spending power is likely to come under increasing pressure,” said Yael Selfin, chief economist at KPMG UK. “The longer-term challenge is how to sustain stronger growth as the contribution from a growing labour force diminishes.”

Wholesale gas prices are set to filter into household energy bills this autumn, with the conflict in Iran adding further strain to the market. The Ofgem price cap is forecast to rise about 4 per cent in October, and the government’s VAT cut on energy is expected to offset only part of that increase.

The Bank of England is likely to raise interest rates soon. The Monetary Policy Committee kept the base rate at 3.75 per cent last week, but the base rate is expected to be lifted to 4 per cent at the November meeting. A tighter monetary stance is intended to curb inflation, yet it also raises the cost of borrowing for businesses and households alike.

Fiscal space is tightening ahead of the Autumn Budget. Borrowing headroom, recorded at €203bn in the spring forecast, has fallen by roughly €9bn after the Iran war-related cost pressures. A possible downgrade to the OBR’s projections could reduce it by a further €2bn, leaving just €12bn in headroom.

“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,” Selfin said.

The consultancy estimates that spending around €47bn in additional investment in England’s seven most underfunded regions, including the Midlands and the North East, could bring them up to the current national average level of capital and yield €25bn in GDP over five years.