Economic outlook: what it means for levy payers

October 2026

• UK economic growth continues to be subdued, with persistent geopolitical uncertainty an ongoing challenge
• Consumer spending remains under pressure, with low consumer confidence impacting food and grocery consumption patterns
• Inflation remains above target with increasing farm input costs maintaining pressure on agricultural margins
• A mixed outlook for borrowing costs, combined with low farm business confidence are creating uncertainty for on farm investment
• Uplifts in statutory minimum wage drive increasing cost of labour for farm businesses

Farm businesses are expected to continue to face pressure from high operating costs, labour cost inflation, policy uncertainty and weather-related challenges, which are likely to constrain profitability and investment decisions.

Domestic demand is likely to remain steady rather than strengthen despite modest projections on income growth. Consumers continue to face pressure on household budgets and are expected to remain highly focused on value when making food purchasing decisions.

The UK economy is expected to continue growing, but only modestly. The Office for Budget Responsibility forecasts GDP growth of around 1.1% in 2026, reflecting continued weakness in business investment and subdued consumer spending.

Longer term, GDP growth is expected to pick up to average 1.6% a year from 2027 to 2030 with economic growth being driven by improvements in efficiency, with less spare capacity left in the economy. 

GDP per capita, an approximate measure of living standards, is expected to improve gradually over the rest of the decade, with real income growth strengthening compared with recent years. This should help support consumer spending on food and drink over time. However, the recovery is expected to be modest by historical standards, reflecting the UK's long-running productivity challenge. As a result, growth in consumer demand is likely to remain steady rather than strong.

The latest figures show CPI inflation at 3.1% in August 2026, reflecting higher energy prices driven by the Iran conflict and remaining above the Bank of England's 2% target. While this is well below the peaks reached during 2022-23, it continues to place pressure on household budgets and is likely to keep consumers focused on value when making food and drink purchasing decisions.

The price index for agricultural inputs increased by 6.4% in the 12 months to July 2026.

The largest upward contribution was plant protection products (+1.9%), followed by fertilisers and soil improvers (+1.4%) and energy and lubricants (+1.2%).

Farm business expenditure on labour, energy, finance and key inputs continues to weigh on profitability. Although inflationary pressures have moderated, operating costs remain significantly above pre-2022 levels, placing pressure on operating margins.

Labour costs remain a particular concern. Increases to the National Living Wage, alongside wider employment reforms, are continuing to raise costs to farm businesses and across the supply chain.

These pressures are likely to be felt most acutely in labour-intensive sectors, where businesses often have limited scope to pass higher costs on to customers. As a result, profitability is expected to remain under pressure.

Household finances remain under pressure with rising energy costs going into Autumn/Winter 2026 due to the continued Iran War and consequent disruption of supply from the Middle East.

Real income growth has slowed, while frozen income tax thresholds continue to draw more workers into higher tax bands. Combined with higher housing, energy and household costs, this is expected to limit growth in discretionary spending over the coming year.

For food and drink markets, this suggests consumers will continue to look carefully for value.

AHDB retail market research shows this could support demand for lower-cost cuts and mince products while limiting growth in higher-value premium categories.

Dairy and pork markets may see consumers continue to favour value-focused retail offerings where budgets remain constrained.

The central forecast from the Office for Budgetary Responsibility (OBR) is for the unemployment rate to rise from 4.75% in 2025 to a peak of 5.3% in 2026 as hiring demand weakens across the wider economy.

For farmers, this could ease some of the challenges around recruitment and labour availability, particularly for entry-level and seasonal roles.

However, labour costs are likely to remain elevated due to increases in statutory minimum wages and National Insurance contributions for employers. While a weaker labour market may help reduce upward pressure on wages over time, labour-intensive sectors are still likely to face significant cost pressures in the near term.

Interest rates have fallen significantly from their peak in 2023, with the Bank of England's Bank Rate currently held at 3.75%.

Lower borrowing costs should help reduce financing pressures for some farm businesses and improve the affordability of investment. However, the Monetary Policy Committee's decision on 16 September to hold rates reflected continuing uncertainty around inflationary pressures, including those arising from conflict in the Middle East. As a result, future interest rate decisions are more uncertain reflecting the current geopolitical outlook.

On farm investment continues to be constrained by weak farmer confidence. The NFU's 2025/26 Farmer Confidence Survey found that producers remain concerned about a range of business risks, with the most frequently cited issues being the phasing out of direct payments (87% of respondents in England expecting a negative impact), increases in employers' National Insurance contributions (83% of employers), regulation and legislation (82% of respondents), and input costs such as fuel, fertiliser and energy (81% of respondents).

Defra’s farmer opinion tracker for England (April) states ‘Farmers on 71% of holdings are not at all confident that changes to schemes and regulations will lead to a successful future for farming,’

Farmers are not alone in lacking business confidence to invest. The Lloyds Business Barometer for September 2026 shows overall business confidence fell to 41% in September, its lowest level for 17 months, driven by uncertainty around geopolitical tensions, changes in global energy prices and the potential implications for costs and financial conditions.

These concerns come at a time when many farm businesses have also experienced the effects of prolonged drought, reducing yields and output in some sectors and placing additional pressure on cash flow.

Debt serviceability will remain a key focus as the combination of policy uncertainty, cost pressures and reduced business confidence is likely to constrain investment decisions in the near term.

The outlook for agriculture remains more challenging than the wider economy.

Farm businesses continue to face a combination of policy transition, high operating costs, labour cost inflation and uncertain market returns. At the same time, adverse weather events and geopolitical developments continue to create volatility across global agricultural markets.

The economic outlook over the next year is best described as one of gradual improvement rather than rapid recovery.

While inflation and borrowing costs have eased significantly, consumer spending remains constrained, and farm businesses continue to face considerable pressure on margins.

Labour costs, policy uncertainty and market volatility are likely to remain key challenges over the coming year.

• Recovery in consumer confidence – the extent to which this recovers is likely to influence demand in particular for higher value products
• Fertiliser and energy prices – if input costs continue to rise, with a subdued domestic demand outlook, farm profits will come under increasing pressure
• Labour availability – despite labour markets softening, agricultural vacancies may still prove challenging to fill
• Interest rates – this is a key parameter that will influence cost of borrowing for levy payers and influence investment spending
• Impact of emerging government agricultural policies – clarity around agricultural policy to enable longer term decisions will be closely monitored