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RSM UK is projecting the British economy will grow just 0.8% in 2026, less than half the 1.5% recorded in 2025. The forecast, published by RSM's economics team, points to a large fiscal contraction as the primary drag, compounded by weak consumer confidence and deteriorating business sentiment. Inflation is expected to slow to around 2.5% by year-end, with interest rates falling to somewhere between 3% and 3.5%. On paper, that sounds like a managed slowdown. In practice, it lands at one of the worst possible moments for UK employers.
What the Data Shows
Sub-1% growth is not a recession, but it's close enough to one that the distinction matters less than it might in better times. At 0.8%, there's essentially no margin for error. An unexpected shock, a global trade disruption, a domestic demand collapse, a policy misstep, tips the number negative without much warning.
The fiscal contraction piece of RSM's analysis deserves particular attention. Government spending pullbacks subtract directly from GDP, and when that happens alongside weak consumer confidence, private sector activity doesn't automatically fill the gap. Households that feel uncertain about the economic outlook tend to save rather than spend, and businesses facing the same uncertainty defer investment. Both behaviors are rational. Together, they compound the slowdown.
The interest rate trajectory offers some relief. Rates dropping to the 3-3.5% range should, in theory, reduce borrowing costs and eventually stimulate investment. But monetary policy works with a lag, and if RSM's forecast is right, the benefits arrive late in the year at best, well after companies have already made their hiring and cost decisions for 2026.
What makes the 0.8% figure particularly difficult for UK businesses is the timing. The Employment Rights Act 2025 changes took effect in April, bringing expanded statutory sick pay, new redundancy consultation requirements, and the launch of the Fair Work Agency with its proactive enforcement mandate. These are structural cost increases arriving into a revenue environment that is, by RSM's reckoning, barely growing.
What This Means
For UK businesses, the squeeze comes from both sides simultaneously. Employment costs are rising due to legislative changes while revenue growth is constrained by weak demand. Margin compression in that environment isn't a risk scenario; it's the base case.
Startups and scale-ups feel this most acutely. A Series A or Series B company operating in the UK right now faces statutory obligations that didn't exist a year ago, a labor enforcement regime that can now investigate proactively, and a broader economy growing at less than 1%. The runway math changes when employment costs rise and the market isn't growing fast enough to absorb them. For companies at that stage, building part of the team in a lower-cost market through an Employer of Record model has moved from a growth-phase option to a margin-preservation decision.
Larger businesses have more cushion, but they're not immune. Multinationals operating in the UK are already running cost reviews in response to the Employment Rights Act changes. A GDP forecast of 0.8% adds pressure to those reviews and makes headcount decisions harder to defer.
Consumer-facing businesses face an additional layer. Weak consumer confidence doesn't just soften demand in aggregate; it changes the composition of spending. Categories seen as discretionary get cut first, and businesses in those sectors may see revenue soften faster than the headline GDP number implies.
The interest rate forecast provides a genuine silver lining, but companies can't plan around a relief that may arrive in Q4. Decisions about hiring, team structure, and operating costs are being made now, against the conditions that exist now.
What to Watch Next
The Bank of England's rate decisions through the middle of the year will be the clearest signal of whether RSM's 2.5% inflation and 3-3.5% rate forecast holds. If inflation proves stickier than expected, the rate cuts get pushed out, and with them, any demand stimulus they might generate.
Watch the UK Autumn Budget too, if there's one scheduled, and any mid-year fiscal statements. A government facing 0.8% growth and rising unemployment pressure may revisit spending plans in ways that either deepen the fiscal drag or partially offset it. Neither outcome is predictable at this stage.
Business investment data, published quarterly, will show whether companies are holding their nerve or pulling back further. A meaningful drop in business investment in the first half of 2026 would confirm that the sentiment weakness RSM identifies is translating into real behavioral changes, not just survey responses.
And the Employment Rights Act's enforcement trajectory matters in its own right. If the Fair Work Agency moves quickly to establish a visible enforcement presence in its early months, that will sharpen how seriously businesses take the cost implications of the new legislation.
The RSM forecast isn't catastrophic. Eight-tenths of a percent is growth, technically. But for a business trying to build headcount, invest in product, and manage statutory obligations that have just expanded significantly, the difference between 0.8% and 1.5% is the difference between breathing room and none.