UK growth forecast upgraded to 1.5% for 2025, but GDP to slow next year

• The EY ITEM Club Autumn Forecast predicts UK economic growth of 1.5% in 2025, an upgrade from the 1% projected in July’s Summer Forecast 
• GDP growth is forecast to slow in 2026, due in part to global trade disruption and tightening fiscal policy 
• Business investment is forecast to grow by 0.8% in 2026, an upgrade from the flat growth predicted in July
• With inflation predicted to average 3.4% in 2025, interest rates are forecast to be held steady in November, but the likelihood of a December cut has increased

The EY ITEM Club has upgraded its forecast for UK GDP growth in 2025 from 1% to 1.5% after the economy displayed a greater momentum than expected throughout this year.

However, the EY ITEM Club Autumn Forecast predicts a slowdown in growth towards the end of 2025 due to the combined effects of a fragile global economy, tighter fiscal policy and reduced consumer spending power. UK GDP is forecast to grow by 0.9% in 2026, before accelerating to 1.3% in 2027.

The UK economy accelerated at a faster than expected rate over the first half of 2025, growing by 0.7% and 0.3% in Q1 and Q2 respectively, largely due to increases in government spending. Upwards revisions to past estimates have also helped to boost growth expectations for the year. However, the EY ITEM Club expects activity to slow towards the end of 2025 and into 2026.

This is partially due to anticipated fiscal tightening to be announced at the Autumn Budget, which is expected to include revenue-raising measures and spending cuts to address the UK’s estimated fiscal shortfall of between £25bn and £30bn. While the Budget is expected to include measures to stimulate growth, meeting the Government’s current fiscal rules would also require some tax changes to be introduced in the coming tax year, and this is anticipated to weigh on growth.

Business investment to slow due to interest rates and global uncertainty 

The EY ITEM Club has upgraded its forecast for business investment growth for 2025 to 3.7%, up from 1.2% predicted in July. This is primarily due to several large one-off projects undertaken at the start of the year related to aircraft purchases, which lifted capital investment growth to 4.1% in Q1. The impact of these measures unwound in Q2, with business investment falling back by 1.1%. 

Growth in business investment is then expected to slow to 0.8% in 2026, partially due to uncertainty in the global economy and the challenging worldwide trading environment caused by tariffs. Potential tax rises in the Autumn Budget could also impact private sector investment levels, albeit this will be highly dependent on the specific measures announced. Nevertheless, the 0.8% growth in investment forecast for next year still represents an upgrade to the 0.0% predicted in July, with a gradual fall in interest rates expected to boost business investment later in 2026.

Business investment growth is then forecast to rise to 1.7% from 2027.

Anna Anthony, EY UK & Ireland Regional Managing Partner, said: “The UK economy has shown encouraging resilience and momentum this year, particularly in the face of significant global disruption. While growth is forecast to continue, we expect a slowdown as tariff challenges and the delayed effects of high interest rates weigh further on economic activity going into next year. 

“The Autumn Budget presents an opportunity to shape the UK’s economic trajectory, and striking a balance between managing the deficit and measures that stimulate growth will be key. The UK has remained a competitive, stable investment destination during a period of international disruption, and preserving that attractiveness and welcoming global capital will be crucial to the UK’s long term economic prosperity.”

Inflation likely past its peak 

Inflation has risen since July’s Summer Forecast and held at 3.8% in September, with fuel and food price inflation continuing to put pressure on the headline rate. The EY ITEM Club predicts that inflation has reached its peak and that the headline rate will cool gradually through Q4 2025, averaging 3.4% in 2025 and 2.7% across 2026. Inflation is expected to reach the Bank of England’s (BoE) 2% target from 2027. 

Unemployment is forecast to continue its slow rise due to elevated labour costs, peaking at 5% in the first half of 2026. However, this is expected to be a temporary increase and far below the 8% level seen at the height of the 2008 global financial crisis. Unemployment is expected to fall back to 4.7% by 2027. 

The small rise in the unemployment rate in 2025 is forecast to drive a further slowdown in earnings this year, with pay growth expected to fall back to around 3.5% by the end of 2025 and 3% by the middle of 2026. 

Consumer spending remains modest and this is forecast to weigh on growth. However, a small rise in household consumption is expected over the coming years as the effects of energy price increases fade and falling interest rates persuade more households to spend rather than save. Consumer spending is predicted to rise by 0.9% in 2026 and 1.4% in 2027. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “To meet its fiscal rules, the Government will need to reduce borrowing by up to £30bn by increasing tax revenue or making spending cuts. Some of these changes would need to be introduced almost immediately, although we can expect potential tax rises to be balanced with supply side growth measures. Nevertheless, the combination of potential tax rises, global trade disruption and high interest rates is still anticipated to put a brake on economic momentum and produce modest growth over the next year.

“Rises in energy, food and regulated prices has kept inflation persistently high, but we’ve likely passed the peak. With services inflation set to come down gradually and pay growth easing, inflation should fall back to the Bank of England’s 2% target by the end of next year.”  

Interest rates expected to hold in November 

With the labour market showing some resilience and with inflation still close to double the 2% target, the EY ITEM Club does not expect a cut to interest rates at the MPC’s November meeting. CPI inflation remaining at 3.8% in September has raised the likelihood of an interest rate cut in December, although the EY ITEM Club expects on balance that the MPC may wait until February before making further reductions. 

Two cuts of 25 basis points each are forecast by mid-2026, which would leave Bank Rate at 3.5% for the rest of the year.