The UK economy will grow by 1.5 per cent in 2026, up from 1.2 per cent last year, according to the latest projections from KPMG, which named investment in artificial intelligence and defence as key drivers of growth.
The professional services firm’s forecast puts UK growth slightly ahead of the eurozone, where it expects GDP to rise by 1 per cent this year, down from 1.4 per cent last year.
A separate monthly survey from the accountancy firm BDO also cited AI and defence investment as drivers of activity. BDO’s output index, which measures services and manufacturing activity, rose to 100.46 in October from 97.37 in September, its highest figure since July 2022. BDO treats any figure above 95 on its indices as positive.
Both reports said the growth came even as household spending power declined amid cost-of-living pressures and concerns about the jobs market.
Yael Selfin, chief economist at KPMG UK, said: “Europe’s economy has remained resilient, but the sources of that are changing. Higher prices and concerns about job security are making households more cautious, while investment in AI, defence and infrastructure is expected to play a greater role in supporting growth.”
Selfin said the recovery remained “vulnerable to further energy price shocks” after the Iran war pushed up global oil and gas prices. She added: “Some of the buffers that helped households and governments absorb the initial disruption have already been drawn down, leaving less room to cushion another setback.”
The Bank of England has already raised interest rates to 4 per cent in its first rise since 2023, and the governor has said firms are cutting costs and margins to absorb energy bills.
KPMG expects UK inflation to average 3.2 per cent this year before slowing to 3 per cent next year. Its forecasts assume that energy costs will gradually ease through 2027.
The firm said price rises were “eroding” households’ purchasing power. It expects food inflation in particular to face upward pressure into 2027, after droughts in Europe this summer and an expected “super” El Niño weather event that could affect crop yields.
Official figures on the labour market have pointed in different directions. The Office for National Statistics said unemployment fell by 0.1 percentage points to 4.7 per cent in the three months to August, while the number of payrolled employees rose by 13,000 to 30.3 million in September.
That fall in unemployment to 4.7 per cent lifted market bets on a rate rise ahead of the Bank’s November decision.
BDO’s employment index, which measures hiring intentions, headcount and labour demand, remained in negative territory in October, edging up 0.02 points to 93.12. BDO expects it to remain around this level for “some time”.
The same report found business optimism at a two-year high, with manufacturing growth boosted by “increased AI and defence-related orders”, according to BDO. Its optimism index rose to 94.73 in October, a level not seen since before the 2024 autumn budget.
Scott Knight, head of growth at BDO, said the government’s “non-budget” last month and the “absence of any significant new costs” would be a relief for businesses. He said: “For the first time in years, genuine growth seems to be on the table. The challenge for the government now is to turn this potential into reality.”
Recruitment data published by KPMG and the Recruitment and Employment Confederation (REC) showed hiring weakening in October. Their permanent placements index fell to 46.6 from 50.9 in September, the first decline in four months. A reading above 50 indicates growth in hiring.
The survey’s temporary billings index, which tracks revenue received by recruiters supplying temporary workers, fell to 48.9 from 50.9. It had not registered a monthly decline since March.
Jon Holt, chief executive and UK senior partner at KPMG, said: “Renewed geopolitical and economic uncertainty weighed on confidence, with further energy price shocks and a global bond sell-off pushing borrowing costs higher.”
