The UK economy is expected to experience another subdued year in 2026, with growth forecasted to decline below 1%. The downgrade came a few weeks before the Chancellor delivered her Budget.

A further hit may come from the Office for Budget Responsibility (OBR). On Budget day, the OBR was expected to reduce its estimate of the UK’s potential growth after reassessing productivity. Officials are likely to trim the assumed annual productivity gains by 0.3 percentage points, which would lower projected tax revenues by approximately £21bn over the remainder of the parliament.

This year’s stronger outturn was flattered by a 3.7% surge in business investment. That rebound is not expected to last: investment growth is forecast to slow sharply to 0.8% in 2026, removing a key support for output.

Conditions in the labour market are also cooling. Unemployment is forecast to peak at around 5% next summer. As slack builds, pay growth is expected to moderate from recent highs, easing back to roughly 3.5% by the end of 2025 and to around 3% by mid-2026.

The Institute of Directors reports a steep fall in business confidence, with its optimism gauge dropping to a record low of -74 in September and only nudging to -73 in October. Many small and medium-sized firms report that cost pressures have risen faster than revenues over the past year, and while those strains are beginning to ease, they continue to be a drag on hiring and investment.

While some recent forecasts now point to a slightly brighter outlook, businesses should still plan on the basis that growth in 2026 is likely to remain subdued, with tight investment and a softer labour market keeping trading conditions challenging.

Talk to us about your business.