UK unemployment is on a troubling trajectory, potentially reaching its highest level in eleven years by 2026 as the economy struggles to regain momentum. The situation is compounded by the need for at least two cuts in interest rates to stimulate growth and counterbalance tax increases introduced by Rachel Reeves. This grim outlook comes from a survey conducted by The Times, which gathered insights from 48 prominent economists who predict that economic growth will remain sluggish, heavily dependent on government spending, even with anticipated reductions in borrowing costs from the Bank of England.
The labour market has been adversely affected by a hefty £25 billion payroll tax implemented by the chancellor and persistently low consumer spending following the pandemic. In fact, 67% of the economists surveyed forecast that the unemployment rate will finish 2026 between 5% and 5.5%. If it reaches the upper limit of this forecast, it would represent a level higher than any recorded during the Covid-19 pandemic, marking the highest rate since 2015. Furthermore, 15% of respondents believe that unemployment could spike to between 5.5% and 6%, which is an increase from the current rate of 5.1%, already the highest seen in nearly five years.
Fhaheen Khan, a senior economist at Make UK, pointed out that businesses are facing rising employment costs from various directions, including increased national insurance contributions and higher minimum wages. These challenges are exacerbated by upcoming indirect employment costs associated with the Employment Rights Bill. Nina Skero, the chief executive of the Centre for Economics and Business Research, echoed these sentiments, stating that hiring will likely be hindered due to the dismal growth outlook, recently raised employer-paid taxes, and the exceptionally high minimum wage in some sectors.
A significant majority, around 58% of economists, anticipate that the UK's GDP growth will hover between 1% and 2% in 2026. This estimate aligns closely with last year's figures and relies heavily on additional government investments and expenditures outlined in the chancellor’s initial two budgets. The Bank of England's interest rate cuts are expected to bolster economic activity and mitigate the tightening fiscal policy, especially considering that most of the £26 billion in tax hikes announced by Reeves will not take effect for several years.
Alpesh Paleja, deputy chief economist at the CBI, suggested that the public sector may take on a more substantial role in driving growth compared to the 2010s through heightened government spending and investment. Paul Dales, chief UK economist at Capital Economics, noted that a staggering 80% of growth in 2026 is likely to stem from the public sector, while private sector activity is expected to remain weak. Jagjit Chadha, an economics professor at the University of Cambridge, lamented that the UK’s economic performance is set to continue its lackluster track.
More than 80% of those surveyed predict that the Bank of England will implement at least two interest rate cuts in 2026, with one economist speculating that rates could fall as low as 2.5% from the current 3.75%. Only one economist suggested a potential increase of 0.25 percentage points, which would mark the first rise since 2023. James Smith, an economist at ING, remarked that the concerns held by the Bank of England regarding inflation risks seem exaggerated, predicting two rate cuts for 2026.
Conversely, Dario Perkins, managing director of global macro at TS Lombard, expressed a more optimistic view, suggesting that growth could surpass expectations if the Bank of England cuts interest rates more aggressively than anticipated, as rates had been reduced four times last year and twice in 2024 after peaking at 5.25%.
Nearly three-quarters of economists believe that UK inflation will reach or be close to the Bank’s target of 2% by the end of this year, primarily driven down by falling household energy bills and slower wage growth amid a weakened labour market.
Looking globally, respondents generally express optimism about economic prospects, with 56% forecasting global growth between 2% and 3%, while 42% expect it to fall between 3% and 4%. A large majority, approximately 75%, anticipate that the US economy will grow by at least 2% this year. However, a majority of 65% of economists predict that China will struggle to meet its annual growth target of 5% in 2026, with the eurozone projected to expand at a pace similar to that of the UK.
