Rising Energy Costs Threaten UK Growth Despite 1.3% Expansion

KPMG’s latest economic outlook projects modest UK expansion, with growth of 1.3% this year and 1.4% in 2027. The consultancy attributes recent strength to household spending—partly boosted by warmer weather—and continued corporate investment in technology, but warns momentum is likely to slow in the latter half of the year.

The firm highlights rising household energy bills and weak wage growth as key headwinds. Higher wholesale gas prices, influenced in part by the conflict in Iran, are expected to feed through to consumer energy costs this autumn, while the government’s planned VAT reduction on household energy will only partially offset the increase. Ofgem’s energy price cap is forecast to rise by about four percent in October.

Monetary policy is also expected to tighten. The Bank of England’s Monetary Policy Committee recently left the base rate at 3.75%, but markets and forecasters anticipate a rise to around 4% at the November meeting as the central bank responds to energy-driven inflationary pressures and signs of a softer labour market.

KPMG’s analysis flags fiscal constraints for the Chancellor ahead of the Autumn Budget. The consultancy estimates the rise in borrowing costs related to the Iran conflict has cut the £23.6bn headroom reported at the Spring Forecast by roughly £9bn; a further downgrade to the Office for Budget Responsibility’s projections could reduce that by about £2bn, leaving roughly £12bn of headroom. KPMG also argues that targeted capital spending—an estimated £47bn of additional investment in seven underfunded regions, including the Midlands and the North East—could close some productivity gaps and deliver around £25bn of GDP over five years.