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      Economically, it has been something of a rollercoaster year so far. At the start of 2026, there was cautious optimism that conditions would strengthen in the UK with falling inflation and interest rates, and indeed GDP performance in the first quarter was reasonably positive. But then the Iran conflict began, prompting significant spikes in input costs for businesses including energy and critical raw materials, pushing inflation back up. Ofgem’s energy price cap to take effect from July rose by 13%, putting more pressure on household budgets.

      At the conflict’s height, the outlook was worrying. However, now a peace deal has been reached, albeit subject to a 60-day negotiation period. Energy prices, gas in particular, have fallen quite quickly in recent weeks and are now only a little above where they were when the conflict began. Recent UK data on inflation and unemployment have been better than expected. Perhaps a corner is being turned.

      Improving economic conditions?

      As a result, at KPMG we expect inflation to peak this summer at close to its present level, then hover around 3% through to the end of the year, declining further to hit the Bank of England’s 2% target by the end of 2027. We also expect UK economic activity to pick up again, with GDP averaging just below 1% this year. On energy prices, if they stay at or around their current level, there is a reasonable chance that the price cap set by Ofgem for the crucial winter months could drop by around 7-8% from its July level – providing a boost for consumers that might help support spending during the Christmas season.

      Given all of this, it is perhaps no surprise that business confidence as expressed in KPMG’s private enterprise Pulse survey has dropped somewhat from six months ago – with 80% of private enterprise leaders confident in the prospects for their business, compared to 87% in late 2025.

      On the other hand, just like the economy itself, the drop could have been much worse: overall, businesses have retained their positivity.

      Moustafa Ali
      Moustafa Ali

      Assistant Manager- Economist

      KPMG in the UK

      Risks on leaders’ minds

      Our research shows that private enterprise leaders regard cost increases and pressures as the number one risk to performance. Ongoing cost pressures and inflation is cited by 47% of leaders as a threat, followed by global disruption impacting supply chains (33%). Given what has been going on around us in the world, these responses are very ‘on the money’.

      Mid-market leaders name tax and fiscal policy uncertainty following the Autumn Budget as the third highest risk (25%), and again this is very topical given current UK political events. Now that we have the prospect of a new Labour leader and Prime Minister, could that usher in a period of uncertainty for business over the direction of travel for tax and fiscal policy? In the run up to last year’s Autumn Budget, there was an extraordinary amount of speculation about what might be in the Chancellor’s announcement. As a result, a slowdown in GDP was visible as businesses put the brakes on decisions. The risk is that something similar could happen again.

      Two critical questions

      In summary therefore, whilst the economic backdrop against which businesses conduct their operations is reasonably sound, and certainly much better than might have been feared just a month or two ago, the outlook for the second half of the year very much hinges on two key questions:

      • Will the Iran peace deal hold (and will energy prices therefore stay where they are or even fall)?
      • Will we retain a sense of tax and fiscal policy certainty in the UK?

      Growth on the agenda

      The Pulse survey gives us much to be encouraged by. Businesses are intent on investing in technology and AI which, implemented successfully, could improve productivity and performance; they are calling for support on this from the government in the Budget as well as a growth-focused investment and industrial strategy; nearly two thirds of leaders expect to diversify their own business through the launch of new products and services or entering new markets, showing that business drive and aspiration remain intact.

      The ambition is there. The willingness to invest for growth is there. The two macro caveats that hang in front of us will largely determine the extent to which all of this translates into actual growth in the economy.

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