‘Spectre of recession’ looms with growth set to dim in 2026
The government is facing a critical warning over the looming “spectre of recession” after economic growth stalled in the second half of 2025 and is expected to wane in the new year.
On Monday, fresh figures from the Office for National Statistics (ONS) downgraded the economy’s second quarter expansion to a sluggish 0.2 per cent from 0.3 per cent previously.
This was followed by a 0.1 per cent expansion in the third quarter with the ONS stating the figures painted a picture of a slowing economy.
Lindsay James, investment strategist at Quilter, said the data “all but confirms what has become very clear in the second half of the year – the UK economy is grinding to a halt and showing little sign of achieving what it did in the first half of the year.”
It marks a major blow to Labour, which stated economic growth would be its “defining mission,” and Rachel Reeves, who staked her political reputation on unleashing growth.
The Office for Budget Responsibility (OBR) also found in Reeves’ November Budget – where she raised taxes to the tune of £26bn – there would be zero impact from the policies introduced on growth.
“The government is going to have to hope that previous measures taken to date begin to bear fruit, or that geopolitical challenges calm down enough that global trade can rebound,” James said.
“Unfortunately, neither seems particularly encouraging right now and as such the first half of next year is likely to be more of the same, if not worse with the spectre of recession beginning to loom.”
Weak growth and possible contractions on horizon
The slowing pace of the UK economy kicked into last quarter of the year with the latest monthly figures for October showing a 0.1 per cent contraction.
“For the first time this year, we see some meaningful risk of a marginal quarterly contraction in real GDP,” said Sanjay Raja, Deutsche Bank’s chief UK economist, said.
“Indeed, Budget uncertainty combined with weak hiring and rising unemployment fear will likely see spending and investment more subdued to end the year.”
In the 12 months to come, economists have pencilled in more subdued growth.
Alex Kerr, UK economist at Capital Economics, said with the economy slowing “significantly” in the second half of 2025 “we doubt 2026 will be much better”.
Capital Economists expects a 1.4 per cent expansion in 2025, before falling to just one per cent in 2026, with the public sector “the main source of growth”.
The Confederation of British Industry (CBI) has pencilled in a 1.3 per cent expansion in the UK economy in the year ahead after Reeves’ revealed an extra £11bn in state spending plans in her Budget.
Chief economist Louise Hellem said the growth upgrade should be interpreted as “cautious optimism” rather than “cause of celebration”, warning that private sector growth was being held back by “underlying challenges” in regulation, taxation and energy.
Private sector businesses sent a warning on Monday with data from the CBI revealing firms expected their downturn to persist until Spring 2026.