The UK is poised for a rise in unemployment in 2026 fuelled by the collapse of “zombie” companies that have struggled to adapt to a rise in business costs, according to a report.
At the start of what could be a pivotal year for the economy, the Resolution Foundation said businesses were grappling with a “triple whammy” of multiyear increases in interest rates, energy prices and the minimum wage that could “finish off” some underperforming companies.
Publishing its new year outlook report, the thinktank said 2026 had potential to be a “turning point” after decades of sluggish productivity growth – a key metric of output per hour of work which is vital for raising living standards.
However, it warned this could involve a sharp rise in unemployment as more unproductive companies go bust.
Ruth Curtice, chief executive of the Resolution Foundation, said there were indications 2026 could be remembered as a “turning point year” by future economists and demographers.
“There are early and encouraging 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,” she said.
“But while this is good news for our medium-term economic prospects, the short-term impact could be job displacement and higher unemployment. Policymakers will need to redouble efforts to address this problem.”
Unemployment in the UK has reached the highest level outside the Covid pandemic in a decade, with the headline rate hitting 5.1% in October as employers held back on hiring before Rachel Reeves’s autumn budget.
Business leaders have said tax increases and a rising living wage are among contributing factors deterring employers from taking on staff.
Experts have warned for several years that Britain has been held back by so-called “zombie firms” – companies which barely make enough money to cover their costs but just about stay in business – preventing the allocation of resources to more productive sectors of the economy.
Economists have suggested that low interest rates in the years since the 2008 financial crisis contributed to this, as cheap borrowing costs helped debt-laden companies to stay afloat.
Businesses have come under pressure from 14 consecutive Bank of England rate between December 2021 and August 2023, designed to tackle inflation. While the Bank has since cut the base rate six times – from a peak of 5.25% to 3.75% – firms’ operating costs remain higher than before the Covid pandemic.
In a sign of the pressure, the British Chambers of Commerce (BCC) warned in a separate report that business confidence slumped to the lowest level in three years in the final quarter of 2025.
In a survey of more than 4,600 firms carried out between 10 November and 8 December – straddling Reeves’s 26 November budget – the lobby group found that tax was the biggest business concern, followed by inflation.
Fewer than half (46%) of companies said they expected increased turnover over the next 12 months, while nearly a quarter (24%) expected a decrease. Only 19% had increased investment and 27% had scaled back plans.
David Bharier, head of research at the BCC, said: “Our data shows more clouds have gathered over business confidence, and the outlook for SMEs in 2026 is unsettled.”
The Resolution Foundation said there were early signs that Britain’s productivity growth was being boosted by “creative destruction”, whereby newer and better firms, products or processes replace older, less-efficient, ones. Adoption of artificial intelligence technologies could also be playing a role, it said.
However, it said the short-term impact from job losses would be “hugely difficult,” and urged the government to focus on supporting living standards.
“Amidst this change one thing that isn’t changing enough is disposable income growth, which is set to grow at mediocre rates for the rest of the parliament,” Curtice said.
“We must hope – but more importantly act – to ensure that 2026 is a turning point year for lifting living standards too.”
