By Miriam Mukuru

The U.K. economy is forecast to grow at a slow pace of below 1% in 2026, weighed down by weak spending by businesses and households, Oxford Economics chief U.K. economist Andrew Goodwin said.

The burden of increased taxes on businesses and high borrowing costs, combined with political uncertainty, is dragging on the economy, he said on the sidelines of Oxford Economics' Global Economic Outlook Conference 2026 in London.

"The private sector has been weak for quite a while. We don't really see that changing this year."

Higher taxes on businesses are weighing on their profitability.

In 2024, the government increased businesses' national insurance tax contributions, among other tax raises. In the Nov. 2025 budget additional tax measures were announced, including raising the national living wage--a minimum hourly pay for workers aged 21 and over.

"It's really important now that the government does not increase the tax burden on firms anymore," Goodwin said.

U.K. businesses are expected to restrict their spending, given weak profitability and high global uncertainty, Goodwin said.

Borrowing costs are still fairly high compared to the near-zero interest rates charged five years ago, even with the Bank of England continuing to cut interest rates.

"Somebody who took out a mortgage in 2021, a 5-year fixed-rate mortgage, they were probably paying between 1.5% and 2%," Goodwin said. "They are now probably paying 4% and above."

High borrowing costs reduce consumers' disposable income and limit their ability to spend.

Goodwin expects the Bank of England could cut its key interest rate twice this year, in April and November and by 25 basis points each time, from the current level of 3.75%. Yields on short-dated U.K. government bonds will likely fall as a result, he said.

U.K. political uncertainty is another factor that could dampen U.K. growth, he said.

Local elections are due to take place in the U.K. in May, and the ruling Labour Party could perform poorly as it trails in recent opinion polls.

Concerns are growing about the possibility of a potential challenge to the leadership of Prime Minister Keir Starmer and that any emerging candidate could favor greater fiscal spending.

"If we have a change of leadership that actually exacerbates the fiscal problems, the U.K. could face a bigger struggle," Goodwin said.

A weak economic outlook will likely weigh on sterling and U.K. government bonds, Goodwin said.

Sterling could potentially drop sharply to between $1.20 and $1.25, while yields on long-dated U.K. government bonds stay elevated, he said. Sterling recently traded at $1.3773.

There are some hopes for the U.K. economy, however.

The AI boom presents an opportunity to drive growth., even as low investments in the industry mean the U.K. isn't benefiting as much as it could, Goodwin said.

"It means making the regulatory environment ready for firms and putting safeguards in place but equally creating an environment that supports growth."

Write to Miriam Mukuru at miriam.mukuru@wsj.com

(END) Dow Jones Newswires

January 29, 2026 11:15 ET (16:15 GMT)

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