Collapse of ‘zombie’ UK firms forecast to fuel unemployment in 2026 | Unemployment
The UK is bracing for a rise in unemployment in 2026 due to the collapse of “zombie” companies struggling to adapt to increases in business costs, according to the report.
At the start of what could be a pivotal year for the economy, the Solution Foundation said businesses were grappling with a “triple whammy” of multi-year increases in interest rates, energy prices and the minimum wage that “could doom” some underperforming companies.
The think tank, which published its new year outlook report, said 2026 had the potential to be a “turning point” after decades of slow productivity growth, a key measure of output per working hour that is vital for raising living standards.
But he warned this could lead to a sharp rise in unemployment as more inefficient companies go bankrupt.
Ruth Curtice, chief executive of the Resolution Foundation, said there were signs that 2026 could be remembered by future economists and demographers as a “watershed year”.
“There are early and encouraging signs of a mild zombie apocalypse, where higher interest rates and minimum wages combine to destroy struggling firms and leave the door open for new, more productive firms to replace them,” he said.
“But while this is good news for our medium-term economic prospects, the short-term impact could be layoffs and higher unemployment. Policymakers will need to redouble their efforts to tackle this problem.”
Unemployment in the UK has reached its highest level in a decade outside of the Covid pandemic; The headline rate hit 5.1% in October as employers delayed hiring ahead of Rachel Reeves’ autumn budget.
Tax increases and rising living wages are among the factors discouraging employers from hiring staff, business leaders said.
Experts have been warning for several years that Britain was being held back by “zombie firms” – companies that are barely making enough money to cover their costs but remain in business, preventing resources from being allocated to more productive sectors of the economy.
Economists have suggested that low interest rates since the 2008 financial crisis have contributed to this because cheap borrowing costs have helped debt-laden companies stay afloat.
Businesses have been under pressure as the Bank of England imposed 14 consecutive interest rates between December 2021 and August 2023 to combat inflation. While the bank has cut its base interest rate six times since then (from a peak of 5.25% to 3.75%), firms’ operating costs remain higher than before the Covid outbreak.
In a sign of the pressure, the British Chambers of Commerce (BCC) warned in a separate report that business confidence had fallen to a three-year low in the final quarter of 2025.
In a survey of more than 4,600 firms conducted between Nov. 10 and Dec. 8, coinciding with Reeves’ Nov. 26 budget, the lobby group found that the biggest business concern was taxes, followed by inflation.
Less than half (46%) of companies said they expected turnover growth over the next 12 months, while almost a quarter (24%) said they expected a decline. Only 19% increased investment and 27% scaled back their plans.
David Bharier, head of research at BCC, said: “Our data shows more clouds are gathering on business confidence and the outlook for SMEs in 2026 is uncertain.”
The Resolution Foundation said there were early signs that Britain’s productivity growth was being driven by “creative destruction”, where newer, better firms, products or processes replace old, less efficient ones. It was stated that the adoption of artificial intelligence technologies could also play a role.
But he said the short-term impact of job losses would be “extremely difficult” and urged the government to focus on supporting living standards.
“What hasn’t changed enough amid this change is disposable income growth, which is expected to grow at mediocre rates for the rest of the parliament,” Curtice said.
“We must hope, but more importantly, act, to ensure that 2026 will also be a watershed year for raising living standards.”
