Most economic forecasters currently expect growth to be modest with the OECD projecting UK GDP growth of around 1.2% in 2026, with inflation still above target
As we come to the end of another turbulent year for the UK economy, what does the next 12 months hold for the economic prospects of the nation?
The good news is that many commentators are now expecting the UK economy to look steadier on paper with inflation lower than its peak, interest rates continuing to fall albeit slowly and growth positive rather than negative.
But that is not the same as recovery and a slightly better set of numbers can still leave households stretched, businesses cautious and public services under strain because the deeper problem is the UK economy’s weak capacity to grow.
Beneath the surface, the same constraints keep reappearing in every serious forecast and business survey and if 2025 was about stabilising, 2026 should be about whether the country can grow again in a way people can actually feel in their wages, bills and opportunities.
Unfortunately, most economic forecasters currently expect growth to be modest with the OECD projecting UK GDP growth of around 1.2% in 2026, with inflation still above target. The CBI’s more recent forecast has been similar arguing that whilst the economy will improve, it may not be by enough to remove the sense of fragility many households and firms still feel after a prolonged period of weak real wage growth and repeated shocks.
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The Bank of England has projected that inflation will rise more slowly into early 2026, although there may still be the “stickiness” underneath the headline such as services inflation, continued wage pressures in parts of the economy and smaller firms remaining wary of borrowing for growth.
However, the cost-of-living problem also doesn’t disappear just because inflation falls as it only slows the rate prices rise, not reverse what has already happened. Meanwhile, the path of interest rates matters as much as inflation for many households and firms because financing costs affect mortgages, rents, investment decisions and cashflow and the long overdue cut last week will have been welcomed.
But the real issue remains one that this column has been highlighting for several years as the key challenge for the UK economy namely productivity. Its ability to generate higher wages without pushing up inflation depends on increasing output per hour and UK continues lag its main competitors with sluggish productivity which then acts as a drag on the medium-term outlook.
In business terms, this is characterised as underinvestment in technology and capital equipment, low management capability, difficulty in scaling, and too many constraints that push firms into short-term decision-making. As such, it determines whether more firms can export, whether we can grow more mid-sized companies, and whether the economy can create the kinds of jobs that keep talent in the country rather than exporting it.
Another key constraint that stops the economy expanding even when demand is there relates to housing, planning and infrastructure. The UK cannot run a modern economy efficiently when housing under supply pushes costs up and restricts labour mobility and the continued emphasis on planning reform should help increase housebuilding and deliver a modest GDP uplift over time.
But it is also not also all about just constructing homes and there must also be a focus on physically building what the economy needs for industry such as grid connections, transport upgrades, industrial sites, and the enabling infrastructure for energy, digital and advanced manufacturing. When delivery is slow, investment becomes slow, productivity becomes slow, and then growth becomes slow.
So what does this mean in practice? It means we stop treating 2026 as a year in which we simply “benefit” from lower inflation and hope growth returns by default. Growth is not something you wait for but is something we build and right now the UK is still making it too hard to do the basics such as hiring, investing, building, exporting and scaling.
This means that the priority should be removing the friction that blocks private investment with visible, practical changes that businesses notice within months, not years. That starts with maximising the opportunities from planning reform that shortens timelines, creates faster decision deadlines, and establishes a presumption in favour of growth sites where infrastructure is available.
It also means making the UK’s public procurement system a route to market rather than a barrier through smaller contract lots, simpler pre-qualification, and an expectation that major contracts will include real SME participation rather than token gestures.
Most important of all is ensuring that more businesses want to grow and transform the economy, and to do this, it has to make growth capital easier to access at the point companies move from a turnover of £1m to £10m and beyond with co-investment that brings in private money and a sharper focus on later-stage finance.
It means making exporting less bureaucratic for smaller firms through practical help with trade finance, insurance, and route-to-market partnerships not just trade missions and photo opportunities. It means backing adoption as much as invention through incentives for SMEs to implement proven tech such as AI, automation, cyber, modern digital systems.
And it means aligning skills policy to what employers actually need including more technical pathways, more employer-led training, and a serious national focus on management capability because productivity is often limited by how firms are run not what sector they’re in.
Simply put, too few UK businesses are growing and that is why wages feel stuck, why investment feels hesitant, and why too many promising firms plateau just when they should be accelerating.
The Chancellor was right in the recent Budget to set the ambition that the UK must become the best place in the world to start and scale a business, but that line should not be remembered as rhetoric but should become reality.
And if there is a total focus on increasing the number of businesses that grow in the UK, then 2026 could, with a fair wind, end up being more transformational than many expect.
Blwyddyn Newydd Dda/Happy New Year.
