Trade uncertainty set to weigh on UK growth over the next two years

• The EY ITEM Club Spring Forecast predicts UK GDP growth of 0.8% this year, down from the 1% growth projected in its Winter Forecast 
• 2026 GDP growth has also been downgraded from 1.6% to 0.9% with trade disruption expected to weaken the global economy and constrain consumer and business spending
• Business investment projections have been significantly downgraded to 0.3% for 2025, down from 2% predicted in the Winter Forecast

Global trade disruption and subsequent market uncertainty are predicted to drive down UK economic growth over the next two years, according to the EY ITEM Club Spring Forecast.

The EY ITEM Club has downgraded its GDP growth expectations for 2025 to 0.8%, down from the 1% predicted in February’s Winter Forecast, and has revised its 2026 forecast down from 1.6% to 0.9%.

While the start of 2025 appeared to show economic momentum building, the weaker global economy and market uncertainty created by trade disruption are expected to limit spending in the second and third quarters of this year as businesses and consumers become more cautious.

This caution is expected to continue into 2026 and will be combined with the longer-term effect of tariffs on businesses and consumers. The EY ITEM Club Spring Forecast assumes that the US will operate with an average tariff rate of more than 20% for much of the rest of the world, which is expected to make it challenging for some UK exports to reach key markets, whilst weakening goods demand and restraining growth.

The EY ITEM Club still expects the UK to return to more moderate levels of GDP growth of 1.5%, but this is now forecast to happen in 2027 rather than in 2026.

Trade and market uncertainty set to subdue business investment

Business investment in the UK is now predicted to be weaker than previously expected over the next two years. This is primarily due to the effect of unpredictable international trading arrangements and high levels of uncertainty in the global economic market. 

To a lesser extent, business investment is also expected to soften due to the elevated labour costs facing companies from increases to the National Living Wage and rising employer National Insurance Contributions, which came into force in April this year. 

The UK is now projected to see modest business investment growth of 0.3% in 2025 and 1% in 2026, downgraded from the 2% and 1.8% predicted in February’s Winter Forecast. 

However, gradual cuts to interest rates over the next year should support capital expenditure growth further into the future, with business investment predicted to rise to 1.8% in 2027. 

Anna Anthony, EY UK & Ireland Regional Managing Partner, said: “There had been signs that the economy was exceeding expectations in the opening months of 2025, but a combination of global trade disruption, uncertainty and persistent inflation look likely to postpone the UK’s return to more moderate levels of growth. Businesses thrive on certainty, so it’s unsurprising that an unpredictable global market is translating into lower levels of business investment over the short term. 

“While conditions remain challenging, there are still some grounds for optimism. The services-led UK economy is projected to see continued growth this year and gradual interest rate cuts should slowly bolster business and household spending. Over time, the unpredictable global landscape may offer opportunities for the UK to position itself as a stable, attractive destination for investment. Policymakers will need to seize these opportunities swiftly, while also maintaining a predictable and transparent policy environment that enables businesses to plan with confidence.”

Trade disruption set to act as a drag on UK growth

The rise in US tariffs on the UK and other countries will act as a clear headwind to UK exports. The US receives around 16% of all exported UK goods but is also a prime destination for UK services. With UK goods exporters expected see their access to the US reduced, and a weaker global economy resulting in lower demands for goods and services, the EY ITEM Club predicts that UK exports will fall by around 0.5% in 2025 and 0.4% in 2026. 

Even if the UK were subject to no changes beyond the current 10% tariff, continued trade escalation between large third-party nations is still likely to have an indirect impact on UK growth by weakening the global economy, increasing supply chain costs, raising the prices of goods and reducing demand in overseas markets. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “US tariffs will act as a drag on UK growth and we’re likely to see a slowdown in economic activity from the second quarter of this year through to early next year. We’re expecting an initial phase of uncertainty that will hold back demand, followed by the direct impact on goods exports as the US and other trading partners are less likely to buy in a weakened global economy. If interest rates remain high by historic standards, these factors may see the cost of capital continue to rise for many firms. 

“The inflationary effect of tariffs on the UK is less certain but, on balance, we expect it to weigh on inflation. Falls in energy prices should, if sustained, translate into lower costs for consumers, while UK importers may also benefit from lower prices as Chinese and European exporters look to access alternative markets to the US. But the pandemic demonstrated that disruption to the cross-border flow of goods can have a powerful effect on inflation and it’s possible that the impact of tariffs may ripple through international supply chains and put upwards pressure on UK goods prices. Overall, we expect inflation to remain sticky as labour costs remain elevated, before falling back towards 2% next year as the effect of higher labour costs begin to fade.” 

Inflation expected to remain above target and unemployment set to see small rise

The EY ITEM Club expects inflation to rise above 3% in April and remain there throughout most of 2025, due in part to increases in energy and water bills seen already this year, alongside rises in unregulated prices such as telecoms and broadband contracts. 

The EY ITEM Club expects inflation to fall to 2.4% in 2026 as services inflation experiences a gradual slowdown and the effect of regulated price increases begin to fade.

The unemployment rate is forecast to rise 0.5% to close to 5% by the end of 2025, gradually settling around 4.5% in mid-2027. Alongside cooling pay growth and sticky inflation, this is expected to slow real household income growth from almost 4% in 2024 to less than 2% in 2025. 

Slowing real income growth, a sense of uncertainty in the economy and growing levels of consumer caution are likely to see household spending limited to 0.9% growth this year. This represents a downgrade from previous predictions of 1.6% growth in the EY ITEM Club Winter Forecast.

Interest rates still forecast to fall gradually 

The EY ITEM Club expects the Monetary Policy Committee (MPC) to continue with its careful pace of rate cuts throughout the remainder of this year as it watches how recent developments effect the economy. Bank Rate is predicted to finish 2025 at 3.75%, before being cut to 3.5% in February 2026. 

However, a faster pace of rate cutting remains a possibility, with the MPC expected to observe the impact of tariffs, as well as rises in employer National Insurance Contributions and the National Living Wage over the summer of 2025. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The Government’s fiscal headroom appeared narrow even before the shift in US trade policy, so this added uncertainty and detrimental effect on UK growth, has added further pressure. We still think the Government will just about meet its fiscal rules, but some headroom will need to be built back even before it thinks about additional spending in areas such as defence. 

“Previous pledges to avoid increases in income tax, employee National Insurance Contributions, VAT and corporate tax rates will limit the options to raise additional revenue, as these taxes make up more than half of the tax base. Disruption to global trade has only increased the chances that we may see a larger fiscal policy rethink in this year’s Spending Review and Autumn Budget.”

House prices still expected to grow despite more subdued economic outlook

Despite the range of complex and persistent economic headwinds limiting the UK’s growth prospects, house prices are still expected to see reasonable growth this year.

The housing market had a strong start to 2025, supported by the uptick in demand from stamp duty thresholds rising back to previous levels at the start of April. Although this support to housing market activity has now faded and affordability challenges remain, gradual cuts to interest rates should help prop up demand to an extent. However, some potential buyers may postpone house purchase decisions until the global economic outlook appears less volatile.

House prices are expected to rise by 3.3% in 2025, which reflects a marginal downgrade from the 3.4% growth projected in February’s Winter Forecast.

Risks to the forecast

Potential future changes to tariffs and other trading arrangements represent significant risks to the forecast. Based on OBR sensitivity analysis, an upside scenario could lift GDP by 0.4% and push up growth in 2026 to 1.1%. But retaliation to tariffs could see GDP weaker by a similar amount lowering our GDP forecast for 2027 to 0.7%.