Underlying Weaknesses Holding UK Economy Back

The latest CBI Economic Forecast finds businesses swimming against the powerful tides of weak demand, elevated labour and energy costs, and ongoing domestic and global uncertainty.

In spite of these challenges, the CBI has upgraded its 2026 GDP growth projection from 1.0% to 1.3%, with the upward revision driven largely by a temporary boost to government expenditure following the Autumn Budget. However, solid headline GDP growth masks persistent weakness in private sector demand, and longer-term prospects will remain constrained by weak productivity and future fiscal tightening.

While the economy began 2025 on a firm note, momentum has softened significantly through the year – with CBI business surveys providing further evidence of consistent sluggishness in underlying activity. Looking ahead, the Economic Forecast highlights only modest growth in household spending, as real incomes growth slows, and weak business investment as key challenges for the longer-term outlook.

The CBI’s latest UK Economic Forecast shows:

• UK GDP growth in 2025 is projected to be 1.4% - an upgrade from our June forecast of 1.2% that reflects historical data revisions.
  

• UK GDP growth in 2026 is projected to rise by 1.3% - an upgrade from our June forecast of 1.0%.
  

• Moderate GDP growth of 1.5% is expected through 2027.
  

• Household spending is expected to remain modest, as slower real income growth and lingering caution weigh on consumption.
  

• Business investment is expected to stay subdued through 2027, reflecting the impact of weak demand, high costs, and both domestic and international uncertainty dampening appetite to invest.
  

• Inflation is projected to ease steadily, helped by fading price pressures, reaching 2.6% in 2026 and 2.3% in 2027.
  

• Private sector employment growth is expected to remain muted, with higher labour costs and soft activity weighing on hiring. The unemployment rate is expected to hover around 5%, which is still low relative to historical standards.
  

• Two further Bank Rate cuts are expected (in December 2025 and early 2026), taking interest rates to 3.5%.

Louise Hellem, Chief Economist, CBI, said:   “While it’s welcome to see our growth forecast upgraded for next year, the mood music reads more ‘cautious optimism’ than ‘cause for celebration.’ The momentum that we saw in early 2025 has clearly faded through the year, and our revised growth forecast has mostly been driven by a near-term boost in government spending and investment – rather than addressing the underlying challenges that are holding the rest of the economy back."

“The forecast shows that the UK economy is continuing to face significant and persistent headwinds. Demand is fragile, domestic and global uncertainty is keeping a lid on business investment, and the cumulative burden of rising employment costs – from NLW and NICs hikes – is hitting firms’ profits and hiring plans. With businesses facing these combined pressures, we’re unlikely to achieve the jump in activity needed to lift the UK's long-term growth ceiling."

“While the Budget did deliver much needed stability, too many bold choices were left unaddressed."

" If the government is serious about restoring business confidence and turbo-charging its own growth mission, it must urgently address some of the biggest barriers to competitiveness – particularly crippling business energy costs, a costly and overcomplicated business tax regime, and uncertainty around future employment costs.”

The Economic Forecast in detail shows:

1 - Underlying activity has been subdued, with uncertainty stifling critical business investment

UK GDP growth has slowed considerably over 2025, chiming with the weak underlying pace of activity reported by CBI surveys. UK businesses continue to face significant headwinds, including weak demand, elevated costs, and ongoing economic uncertainty. Persistent instability forced many firms into a “wait and see” mode leading up to the Budget, directly contributing to the recent deterioration in investment and hiring plans across key sectors.

2 - Steady growth supported by near-term fiscal policy loosening

Higher government spending following the 2025 Autumn Budget is expected to provide short-term support to growth. However, backloaded tax rises from 2028 will drag on growth beyond our forecast horizon. Taking into account persistently elevated public borrowing costs, the near-term public finances outlook remains vulnerable.

3 - Household spending growth expected to remain sluggish

Household spending is expected to grow only modestly, as a marked slowdown in real incomes growth weighs on consumption. We assume that households run down some savings to support spending, although persistent precautionary behaviour means that the savings ratio stays elevated relative to recent historical norms.

4 - Business investment remains weak amid high costs and elevated uncertainty

Business investment is expected to remain subdued, consistent with the deterioration in investment intentions in CBI surveys. Weak demand and high labour costs continue to squeeze profits, while elevated economic uncertainty also dampens firms’ appetite to invest.

5 - Inflation set to slow to 2.6% in 2026 and 2.3% in 2027

CPI inflation is projected to steadily ease over our forecast, slowing from 3.4% in 2025 to 2.6% in 2026, as the impact from previous price increases in energy & utilities bills fades. Inflation is then projected to fall further in 2027, to 2.3%, nonetheless remaining above the Bank of England’s 2% target.

6 - Higher labour costs will weigh on private sector employment

Private sector employment growth is projected to remain muted, with higher labour costs – linked to recent increases in employer NICs and the NLW – and soft activity weighing on hiring. The unemployment rate is forecast to hover around 5%, which is still low by historical standards. Wage growth is expected to ease gradually, driven by falling inflation, but it is still set to continue increasing in real terms.

7 - Bank Rate expected to settle at 3.5% in early 2026

Our forecast expects that the Bank of England’s Monetary Policy Committee will reduce the Bank Rate by 25 basis points each in December and Q1 2026, resulting in a terminal rate of 3.5%. This is assumed to leave monetary policy in a slightly restrictive position, consistent with our expectation that inflation remains marginally above target through 2027. Our forecast implies that borrowing costs for both businesses and households will remain noticeably higher than pre-COVID norms.

8 - Weak productivity growth remains a critical drag on the economy

Productivity (as measured by output per worker) is projected to remain subdued throughout the forecast period, which will limit the UK's long-term growth prospects and living standards. By late 2027 (Q4), productivity is expected to sit approximately 2% below its already weak pre-COVID trend, with the gap widening to about 24% below the pre-2008 financial crisis trajectory.