Britain's economic growth is projected for 2026, but rising energy costs and high loan rates will impact economic activities in the second half of the year. According to the latest economic forecasts from KPMG, economic growth is expected to reach 1.3% this year as household costs have increased due to mild weather and businesses continue to invest in technology.
Impact of Rising Energy Prices on Household Purchasing Power
KPMG has also predicted that economic growth will reach 1.4% in 2027. However, household costs are expected to decrease in the second half of the year as households face rising energy costs and slow wage growth. Yael Selvin, Chief Economist at KPMG UK, said, "Household purchasing power is likely to come under more pressure." She also noted that the long-term challenge is how to sustain stronger growth while the labor share is declining.
Forecast of Rising Energy Prices and Their Impacts
High natural gas prices are expected to be passed on to household energy prices this fall, putting new pressure on inflation. This comes as tensions in Iran continue to affect the market. It is expected that Ofgem's energy price cap will rise by nearly 4% in October. The government's reduction of VAT on household energy costs will only partially offset the price increases.
Additionally, the Bank of England is expected to raise interest rates in the coming months to address high energy prices, a weak labor market, and low domestic inflation. The Monetary Policy Committee (MPC) decided last week to maintain rates at 3.75%, but the base rate is expected to rise to 4% at the November meeting. The Chancellor is also facing a financial challenge in the autumn budget, as there is limited scope to provide significant support for growth and living costs.
Rising loan costs following the war in Iran have reduced the £23.6 billion space recorded in the spring forecast by nearly £9 billion. Weak growth and a forecast decline in OBR estimates may reduce this space to £12 billion.
