Understanding the economic landscape ahead
UK GDP is forecast to grow by 0.9% in 2026, before accelerating to 1.3% in 2027, with the economy expected to slow towards the end of 2025 due to the combined effects of a fragile global economy, tighter fiscal policy and reduced consumer spending power. This presents both challenges and opportunities for strategic business planning.
What the forecasts mean for your business
Business investment growth is expected to slow to 0.8% in 2026, partially due to uncertainty in the global economy and the challenging worldwide trading environment caused by tariffs, before rising to 1.7% from 2027. The message is clear: 2026 will be a year requiring caution and careful cash management, whilst 2027 offers stronger growth prospects for those who position themselves correctly.
Inflation is forecast to be higher in 2025, reaching 3.2% by Q4 2025, before falling to 2.2% by the end of 2026 and 2% in Q4 2027. This gradual descent to the Bank of England’s target brings both relief and challenges – input costs should stabilise, but pricing power may diminish as competition intensifies.
Labour market and employment costs
Unemployment is forecast to continue its slow rise due to elevated labour costs, peaking at 5% in the first half of 2026, before falling back to 4.7% by 2027. Combined with recent National Insurance increases, this creates a complex workforce planning environment.
Average earnings are expected to reach 4.2% by the end of 2025, falling only gradually to 4.1% in 2026 and 4% in 2027, putting continued cost pressures on businesses. Wage demands will remain elevated even as inflation moderates, squeezing margins unless offset by productivity improvements.
Consumer spending and market demand
Consumer spending is predicted to rise by 0.9% in 2026 and 1.4% in 2027, as the effects of energy price increases fade and falling interest rates persuade more households to spend rather than save. This suggests consumer-facing businesses should see improving conditions from late 2026, but must weather challenging conditions in the interim.
Annual real GDP growth is expected to average 1.4% from 2026 onwards as strengthening consumption and investment offset fiscal headwinds and productivity gains increase the UK potential growth rate. The key to thriving in this environment is productivity – businesses that can achieve more with existing resources will significantly outperform.
Strategic imperatives for 2026-2027
Liquidity management comes first. With modest growth and continued cost pressures in 2026, maintaining robust cash reserves and flexible credit facilities is essential. Review your working capital cycle and identify opportunities to accelerate cash collection or extend payment terms with suppliers.
Invest in productivity, not just capacity. Given the wage and NI cost environment, expansion through headcount is expensive. Focus investment on technology, automation, and process improvements that increase output per employee. Business investment projections show 0.3% growth in 2025 and 1% in 2026, downgraded from earlier predictions, indicating many businesses share this cautious approach.
Prepare for recovery in 2027. Those who maintain financial strength through 2026’s challenges will be best positioned to capitalise on 2027’s improved conditions. Strategic planning should identify growth opportunities that can be executed when economic conditions strengthen.
Scenario planning is vital. Potential changes to tariffs and trading arrangements represent significant risks, with scenarios showing GDP could vary by plus or minus 0.4%. Develop plans for multiple scenarios rather than betting on a single outcome.
The competitive advantage of strategic foresight
The difference between businesses that thrive and those that merely survive in 2026-2027 will be strategic preparation. At FMY Chartered Accountants, we help clients model different scenarios, stress-test assumptions, and develop flexible strategies that work across a range of economic conditions. Our experience working with businesses through previous economic cycles shows that companies receiving proactive strategic advice significantly outperform those taking a reactive approach. Now is the time to review your three-year plan, update your assumptions, and ensure your business is positioned for whatever 2026 and 2027 bring.
Contact FMY Accountants today at info@fmyaccountants.co.uk for tailored advice and a personalised plan for your business.