UK unemployment is predicted to rise to its highest degree in 5 years in 2026 as beforehand introduced tax will increase start to weigh on development and hiring, in line with new forecasts from the EY Merchandise Membership.
The forecasters warned that joblessness might peak at 5.2 per cent within the first half of this 12 months, up from the present 5.1 per cent and the best degree since January 2021, as modest financial development is constrained by tighter fiscal coverage and world uncertainty.
The EY Merchandise Membership mentioned tax rises introduced by Rachel Reeves in her first Price range are set to have a extra pronounced affect this 12 months, dampening each client spending and enterprise funding. Employers have been already hit by a £25 billion enhance in nationwide insurance coverage contributions final spring, a transfer that enterprise teams have warned would curb hiring.
Matt Swannell, chief financial adviser to the EY Merchandise Membership, mentioned the results of fiscal tightening are solely now beginning to filter by the economic system.
“Additional tax rises might not be anticipated in 2026, however beforehand introduced measures will start to lift revenues,” he mentioned. “On the similar time, the federal government might want to rein in borrowing and preserve public spending broadly flat to satisfy its fiscal guidelines.
“This tightening of fiscal coverage, alongside ongoing world uncertainty, is predicted to pull on UK development over the subsequent 12 months or so.”
Financial development is forecast to stay subdued. The EY Merchandise Membership now expects UK GDP to develop by 0.9 per cent this 12 months — barely larger than its earlier estimate of 0.8 per cent, however nonetheless weaker than in 2025. Development is then projected to recuperate modestly to 1.3 per cent in 2027 and 1.4 per cent in 2028.
Reeves introduced an additional £26 billion of tax will increase in final November’s Price range, though, as along with her earlier package deal, a lot of these measures won’t take impact for a number of years. Even so, the cumulative affect of upper taxes is predicted to weigh on confidence.
The EY Merchandise Membership mentioned world dangers stay a serious headwind. Commerce tensions and tariff disruption, significantly linked to the insurance policies of Donald Trump, are anticipated to proceed undermining non-public sector sentiment.
Monetary markets have been unsettled in January after Trump examined Nato alliances and introduced plans to appoint Kevin Warsh as the subsequent chair of the Federal Reserve, including volatility to foreign money and commodities markets. Considerations have additionally lingered round inflation and public spending commitments in main economies, together with Japan.
On financial coverage, the EY Merchandise Membership expects the Financial institution of England to carry rates of interest regular at its assembly this week, earlier than chopping once more in April. Charges have been diminished 4 occasions final 12 months, falling from 4.75 per cent to three.75 per cent.
Regardless of slower development and rising unemployment, pay development is predicted to stay comparatively resilient. The EY Merchandise Membership forecasts common salaries will rise by round 3 per cent this 12 months, although that can translate into solely modest enhancements in dwelling requirements as larger taxes and costs proceed to erode family incomes.
The outlook means that whereas a deep recession shouldn’t be anticipated, the UK faces a interval of weaker development and rising labour market stress as fiscal tightening and world uncertainty converge.
