INFLATION may be cooling and a Bank of England rate cut may be incoming, but one business owner has described the UK economy as a ‘stagnation sandwich’ where “there may be tasty interest rate cuts on the outside, but in the middle there’s a very thin, dry filling of weak growth, demand and hiring”.
Others echo that sentiment, with one recruitment expert saying “the fiscal hit of increased National Insurance and wage legislation remains a significant barrier to growth despite inflation moving in the right direction”. But some business owners say they are “cautiously optimistic” about the year ahead.
In January, inflation fell to 3% from 3.4%, which is welcome news for the economy. But on Tuesday, official data showed unemployment rising to 5.2% and the number of people on payroll plummeting.
The early estimate of payrolled employees for January 2026 decreased by 134,000 (0.4%) on the year, and by 11,000 on the month, to 30.3 million. Vacancy numbers have also remained flat, as businesses put hiring on hold.
Stagnation sandwich
Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, a forex broker, said: “My UK clients tell me the outlook for the UK economy is a ‘stagnation sandwich’. Yes, there may be tasty interest rate cuts on the outside, but in the middle there’s a very thin, dry filling of weak growth, demand and hiring.
“For the small business owner on the high street, 2026 feels less like a recovery and more like a survival exercise.”
Redondo said that his clients who are most optimistic currently are those selling their products and services overseas, and encouraged others to look into this given the weakness of the UK economy.
He said: “With everyone online these days, it’s never been easier for any business, however small or new, to have overseas clients and suppliers. Demand in the UK is fundamentally broken and may not recover for some time, so more UK businesses need to start focusing their attention internationally.”
Fiscal hit
Lesley Beauchamp, Director at Nottingham-based Express Recruitment, agreed that the rate of inflation slowing and the prospect of rate cuts may not be enough given the punitive taxation environment and weak business confidence.
She said: “The drop in inflation is a welcome reprieve but the fiscal hit of increased National Insurance and wage legislation remains a significant barrier to growth.
“While a rate cut would offer some relief, businesses are currently navigating shrinking hiring budgets and a cautious labour market.
“Therefore, despite inflation cooling, the rising unemployment figures suggest we should expect continued turbulence as the economy recalibrates throughout 2026.”
Adaptable and resilient
Kerry Bilson, Director at Letterbox Love a jewellery gift company, said businesses like hers are having to be more resilient than ever: “As a small business owner, it’s great to see inflation cooling, but experience tells us to proceed with caution.
“The past 18 months have been incredibly hard for small businesses, with rising wages, National Insurance changes, tariff changes and general running costs all adding up, and we have been sad to see so many businesses close.
“A potential rate cut sounds positive, but confidence doesn’t return overnight. We do feel positive for 2026 but in the back of our mind last year taught us that no one is safe.
“Letterbox Love is focused on steady, sustainable growth rather than big and bold risks. With so many external challenges being thrown our way that are completely out of our control, we have had to learn to become incredibly adaptable and resilient.”
Leaders should lead
Meanwhile, Astrid Davies, CEO at ADCL, a leadership consulting business, is worried that many businesses are cutting senior staff at exactly the time they need them.
She said: “Leadership development is often one of the first areas to be cut, which is ironic when the tough times are precisely when leadership needs to be at its peak. So it’s been an interesting few months.
“However, I am noticing clients looking for productivity gains and being more on the front foot about their growth plans at the start of 2026. That’s where the leadership really counts — the bravery to back yourself.
“And with a few better signs from the economy, their bravery really is starting to look well-placed. We need all the proactive, positive, responsible leadership we can get at the moment.”
Cautious confidence
Other business owners are also slightly more upbeat about the year ahead.
Colin Crooks MBE, CEO at Intentionality, a consulting firm, commented: “Working across sectors as diverse as architecture, jewellery, manufacturing and catering, I’m seeing a cautious confidence quietly becoming the dominant mood.
“The cost pressures of the past 18 months, NI increases, business rates, and minimum wage rises, have either been absorbed or passed on. That pain is largely in the rear-view mirror.
“My clients aren’t waiting for the economy to give them permission to grow, and a rate cut in March won’t fire the starting gun. The businesses I work with are already working to gain competitive advantage and are not just in survival mode.
“On jobs, SMEs aren’t paralysed but they are being more careful and investing in the right people and capabilities.”
Tempting fate
Kate Allen, Owner at Kingsbridge-based Finest Stays, a luxury lettings company on the south Devon coast, is also quietly confident about UK holiday bookings this year.
She continued: “Without wanting to tempt fate, we’re currently pacing ahead on both occupancy and revenue, so we’re cautiously optimistic.
“If inflation continues to cool and we see rate cuts, that should help consumer confidence, which is crucial for discretionary spend like travel.
“That said, the reality for many businesses is still tough. Rising employment costs, National Insurance increases and wider fiscal pressures are making hiring decisions much harder.”
