Unemployment in the UK is expected to rise to its highest level in more than a decade by 2026, as economists warn that weak growth, rising employment costs and reduced confidence in the private sector continue to weigh on the labor market.
According to The Times’ annual Economists Survey of 48 leading economists, more than two-thirds believe the unemployment rate will end in 2026 between 5% and 5.5%, down from 5.1%. If the high end of that range is reached, it would mark the highest unemployment rate since 2015.
The survey paints a bleak picture of an economy heavily reliant on government spending, with private sector employment held back by higher taxes, rising wages and continued uncertainty following the Chancellor’s Autumn Budget.
Economists are pointing to Rachel Reeves’ £25bn increase in employer National Insurance contributions, as well as higher minimum wages and upcoming changes under the Employment Rights Bill, as driving up hiring targets.
Faheen Khan, senior economist at Make UK, said businesses are being hit on “multiple fronts” when it comes to employment costs, making recruitment and staffing difficult.
Nina Skero, chief executive of the Center for Economics and Business Research, added that hiring will remain “suppressed” as firms face weak demand, higher payroll taxes and what she described as “very high” minimum wages in some sectors.
For small and medium-sized enterprises, these pressures are already translating into more cautious staffing decisions, delays in hiring and a greater reliance on automation and productivity improvements rather than mass population growth.
Most economists surveyed expect UK GDP growth to remain between 1% and 2% in 2026 – broadly in line with recent performance but far from the levels needed to improve living standards or business confidence.
Several economists have warned that much of that growth will be driven by public spending rather than private investment.
Alpesh Paleja, deputy chief economist at the CBI, said the public sector was likely to do “heavier lifting” than at any time since 2010, while Paul Dales, chief UK economist at Capital Economics, estimated that 80% of growth by 2026 could come from public sector jobs.
Jagjit Chadha, a professor of economics at the University of Cambridge, summed up the view bluntly, describing the UK’s performance as “moribund”.
More than 80% of economists believe the Bank of England will cut interest rates at least twice by 2026, with some predicting a cut from 3.75% to as low as 2.5%.
While lower borrowing costs may provide some relief to households and businesses, economists have warned that rate cuts alone are unlikely to cause a strong rebound in private sector investment or hiring.
James Smith, advanced markets economist at ING, said inflation concerns were “overblown”, suggesting there was room for monetary easing. However, others have warned that unless confidence improves and employment costs stabilize, businesses may remain reluctant to expand.
Almost three-quarters of economists expect UK inflation to be close to the Bank of England’s 2% target by the end of 2026, helped by lower energy bills and slower wage growth as the labor market cools.
All over the world, economists were optimistic. Most expect global growth of between 2% and 3%, with the US economy forecast to outpace the UK and the eurozone. However, most expect China to miss its 5% growth target next year.
For business owners, especially SMEs, the survey reinforces expectations for a challenging year ahead: slow demand, cautious consumers and a strong employment situation.
While interest rate cuts may ease pressure on borrowing, economists warn that without significant improvements in productivity, private investment and business confidence, the labor market is likely to remain weak until 2026.
