What's the economic outlook for 2026?

 Today's ONS statistics were not good news.  Unemployment has risen to 5% in March with the biggest job loss of 100,000 since 2020. On the "positive" news wage growth fell from 3.6% to 3.4%.

The stats are for the period Jan-Mar this year.  However the minimum wage 8.5% increase takes effect from April so expect this to trigger around a 0.3% increase in inflation.  Hard pressed hospitality businesses have to absorb this high cost.  My personal observation from Wetherspoons is they have solved the increase by having fewer staff. There used to be about 4 people behind the bar and it's now 2 or 3 people. There appears to be a correlation between increased minimum wage and rising unemployment.

As the ONS reports quarterly this effect of the minimum wage will be baked in by July (one quarter later) and it's effect will not longer be reported since they report relative percentages rather than absolute increases.

In July the Ofgem energy price cap is expected to rise from £1,641 to £1,850 per year  (+12.7%). Again this is inflationary.

The situation with Iran does not look like it's going to be resolved soon.

So my personal crystal ball gazing is that inflation will continue to rise this year placing more pressure on the Bank of England to increase interest rates however this will be in the backdrop of declining employment and presumably declining or stagnant GDP. Stagflation looks headed our way.

The Bond markets are also not happy with the Starmer chaos. This is increasing the cost to service the huge debt pile. It's costing around an extra £7M per day in interest payments so roughly £212 million per month extra costs.

So for the extra 100,00 unemployed, assuming they were on minimum wage that's a loss of £3,215 employer national insurance contributions and £3,880 NI and tax from the employee resulting in a loss of £710 Million in tax.  It will most likely result in an these unemployed claiming welfare payments. Lets assume they claim just the job seekers allowance of £95.55 per week then that will result in a benefits bill of £497 Million.  The real number will probably be higher with universal credit claims etc.

So this is a net hit to the economy of £1.2 Billion (£100 million per month).  This picture could be repeated every month this year creating a compounded impact far greater than the additional interest payments to the bond markets.

Additionally the rich are leaving pushing the tax burden down the food chain and AI seems to be starting to eat into those well paid middle class jobs like lawyers, software engineers etc.

The future doesnt look bright for 2026.

 

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