UK growth to slow further as labour market weakens, KPMG predicts

(Sharecast News) - A weakening labour market and meagre consumer spending is expected to weigh on the UK economy in 2026, with GDP growth expected to slow to just 1%, according to KPMG. In its UK Economic Outlook report for December, the Big Four accountancy firm predicted that headline GDP would slow from an estimated 1.4% in 2025, before picking up to 1.4% in 2027.

KPMG said that higher employment costs have impacted the labour market, along with a slowdown in domestic demand, with the unemployment rate having trended higher over the past year, from 4.4% to 5.0% as of the third quarter.



Despite the increase being largely driven by more people returning to the labour market to seek work, redundancy levels have been steady, while job switching remains subdued, reflecting a "climate of caution", the firm said.

"Together, these trends indicate that the labour market has lost some of its previous dynamism. With weaker domestic demand and rising costs, survey evidence suggests that some employers are increasingly turning to artificial intelligence as a means of achieving efficiency savings," KPMG said.

The firm cited recent research from the CIPD which found that 17% of UK employers expect AI to shrink their workforces within the next year.

Meanwhile, KPMG highlighted a "more benign" inflation outlook which, along with greater clarity on fiscal policy, should enable the Bank of England to cut interest rates to 3.75% at its last meeting of the year, cutting to 3.25% in 2026.

However, lower rates are unlikely to kickstart an immediate recovery in the housing sector since domestic demand remains so weak, the firm said.