Highlights
- UK unemployment already at highest level outside Covid pandemic in a decade, reaching 5.1 per cent in October.
- Businesses facing 'triple whammy' of higher interest rates, energy prices and minimum wage increases.
- Business confidence slumps to lowest level in three years, with tax concerns topping employer worries.
The UK is poised for a significant rise in unemployment in 2026 as struggling "zombie" companies collapse under mounting business costs, according to a new report from the Resolution Foundation.
The thinktank warned that businesses are grappling with a "triple whammy" of multiyear increases in interest rates, energy prices and the minimum wage that could "finish off" underperforming firms, leading to job displacement.
Ruth Curtice, chief executive of the Resolution Foundation, told The Guardian that there were indications 2026 could be remembered as a "turning point year" by future economists.
She noted early signs of a "mild zombie apocalypse, where higher interest rates and minimum wages have combined to kill off struggling firms and leave the door open for new, more productive ones to replace them."
However, Curtice cautioned that "while this is good news for our medium-term economic prospects, the short-term impact could be job displacement and higher unemployment."
Economic pressures rise
UK unemployment has already reached 5.1 per cent in October, the highest level outside the Covid pandemic in a decade, as employers held back on hiring before chancellor Rachel Reeves's autumn budget. Business leaders cite tax increases and a rising living wage as factors deterring recruitment.
Zombie firms, companies that barely make enough money to cover costs but manage to stay in business have held back Britain's economy for years by preventing resources flowing to more productive sectors.
Low interest rates following the 2008 financial crisis allowed debt-laden companies to survive on cheap borrowing.
Pressure intensified following 14 consecutive Bank of England rate increases between December 2021 and August 2023. Although the Bank has since cut rates six times from a peak of 5.25 per cent to 3.75 per cent, operating costs remain significantly higher than pre-pandemic levels.
The British Chambers of Commerce reported business confidence slumped to its lowest level in three years in the final quarter of 2025.
A survey of over 4,600 firms found tax was the biggest concern, followed by inflation. Fewer than half (46 per cent) expected increased turnover over the next 12 months, while only 19 per cent had increased investment.
The Resolution Foundation suggested Britain's productivity growth was being boosted by "creative destruction," whereby newer firms replace less-efficient ones.
Artificial intelligence adoption could also play a role. However, the thinktank urged the government to focus on supporting living standards, warning that "disposable income growth is set to grow at mediocre rates for the rest of the parliament."
