Rising Energy Costs Threaten UK Growth Despite 1.3% Expansion

The UK economy is predicted to expand by 1.3 percent in 2026, according to KPMG's latest economic outlook, despite rising energy costs and higher borrowing rates posing challenges to growth in the latter half of the year. Households' spending power is expected to weaken as energy bills rise and wages stagnate, according to Yael Selfin, KPMG UK's chief economist.

The government's partial mitigation of the VAT reduction on household energy bills and the Bank of England's anticipated interest rate hikes to curb inflation and address weak domestic growth are expected to further constrain household spending. KPMG also highlights the importance of increasing investment in England's most underfunded regions, such as the Midlands and the North East, to close the productivity gap and foster long-term growth.

The consultancy estimates that investing approximately 47 billion pounds in these areas could raise capital levels to the national average and generate 25 billion pounds in GDP over five years. The efficacy of each project, combined with enhanced private sector investment and viable local growth strategies, will be crucial in translating additional public spending into sustained improvements in productivity and living standards.