UK GDP growth to slow in 2026 amid global energy supply disruption

• The EY UK Economic Outlook predicts 0.8% GDP growth in 2026 and 1.2% in 2027 
• Inflation set to peak above 4% by end of year as Bank of England expected to hold interest rates until Spring 2027 
• EY analysis outlines how industrial and consumer-facing businesses are particularly exposed to global energy supply disruption

The conflict in the Middle East is forecast to weigh on the UK economy and exacerbate longstanding national challenges related to consumer spending and energy prices, according to the new EY UK Economic Outlook.

EY analysis shows that, prior to the outbreak of the conflict in the Middle East, UK GDP was on track to grow by 1.3% in 2026. However, the disruption to global energy supply and subsequent effect on prices and inflation are now predicted to weigh on the UK’s economic momentum, slowing GDP growth to 0.8% this year.  

GDP growth is then expected to rise to 1.2% in 2027, although this remains below the 1.4% that the UK was on track to achieve prior to the conflict.

The Outlook’s modelling is based on the Strait of Hormuz reopening by the end of Q2 2026, albeit with subdued levels of tanker traffic and a continued risk of disruption. However, if there is an escalation in the conflict and the strait remains closed until the end of 2026, the Outlook’s model suggests that UK GDP growth could fall to 0.3% this year.  

The Outlook anticipates that increases to wholesale energy prices will fuel a rise in energy bills, driving UK inflation above 4% by the end of 2026. The Bank of England is now expected to hold the Bank Rate at 3.75% throughout the year, in contrast to the two reductions priced in by the market prior to the conflict. EY now forecasts that the next reduction in interest rates will occur in April and July 2027, with the Bank of England expected to implement two cuts of 25 basis points each before leaving the Bank Rate at 3.25% for the remainder of 2027. 

Continued global economic uncertainty, heightened inflation and elevated interest rates are expected to weigh on demand and order books for businesses, prompting reductions or delays to some spending decisions. EY is forecasting flat UK business investment growth of 0% in 2026, which is then expected to rise to 2% in 2027 and 3% in 2028 as lower interest rates reduce the cost of capital.  

Unemployment is forecast to increase slightly to 5.8% by the end of 2026 as weaker growth impacts hiring levels, before falling back to 5.5% within a year and reaching 5.2% in 2028.  

Anna Anthony, EY UK & Ireland Regional Managing Partner, said: “Businesses are continuing to grapple with the very real consequences of global volatility: turbulent energy prices, supply chain disruption, inflation and elevated interest rates. Making strategic investment decisions in this environment is challenging but critical as companies look to adapt, build resilience and continue to compete internationally. 

“The UK has been a resilient market in recent years, but high electricity prices continue to put pressure on industrial businesses and limit investment appetite. The Government’s recent expansion of the British Industrial Competitiveness Scheme and commitment to diversifying the UK’s energy mix are welcome steps forward. Tackling these structural challenges will take time, but addressing energy costs and resilience offers an enormous opportunity to boost UK competitiveness by widening business margins and unlocking capital for those long-term investments at the heart of the Industrial Strategy.” 

High industrial energy costs are already a £30bn drag on UK economic output

Energy supply pressures driven by the conflict in the Middle East are anticipated to have a particularly pronounced impact on companies that use substantial amounts of energy in producing materials, such as steel, plastic or chemical manufacturers, as well as the businesses that purchase these goods. This would exacerbate a longstanding UK challenge. 

The UK’s industrial electricity prices have increased in recent years, climbing from the tenth highest in Europe in 2019 to the highest by 2024. EY analysis has determined that higher relative energy costs have already affected national growth and that the economic output of the UK’s energy intensive industries fell by 8% between 2019 and 2024, while all other industries grew by over 6%. The EY UK Economic Outlook suggests that had energy‑intensive industries kept pace with other sectors over this timeframe, UK GDP would have been £30bn higher in 2025.

EY modelling examined the long‑term impact of the current energy price disruption across UK sectors over a five‑to‑ten‑year horizon. The analysis shows that UK heavy manufacturing and energy utilities are expected to be most affected, with output 2.2% and 1.8% lower over the longer term respectively when compared to the previous baseline forecast, as labour and capital shift towards less energy‑intensive areas of the economy. In contrast, business services are projected to see marginally higher levels of output over the long term (0.08% higher than the previous baseline level) as resources are reallocated towards this sector. 

Peter Arnold, EY UK Chief Economist, said: “Despite a relatively strong start to 2026, the conflict in the Middle East means the UK economy is once again being shaped by external shocks and on track for another year of subdued growth. We expect the first quarter of this year to show GDP on a fairly promising trajectory, before flatlining in the second quarter and gradually recovering into 2027 as the global markets adjust. Energy supply constraints will push inflation higher and delay interest rate cuts, increasing the cost of borrowing for businesses and prompting some companies to reassess spending decisions. 

“Industrial and consumer-facing businesses are particularly exposed to the effects of energy volatility. High electricity prices were already constraining UK economic output last year, and further energy market disruption will intensify this pressure. Cautious levels of consumer spending seen since the pandemic also now appear more structural than temporary, with all income groups reallocating household spending towards savings and essentials and away from discretionary spending. This is a concerning trend for consumer-facing sectors and will likely be exacerbated by ongoing global uncertainty and the predicted rise in inflation.” 

Risk for UK consumer-facing sectors as spending shifts to essential over discretionary 

According to the Outlook, UK consumer spending will grow by 0.3% in 2026, compared to the 0.9% growth the UK had been on track to achieve prior to the Middle East conflict. This is expected to be followed by 1.5% growth in consumer spending in 2027 and 2.2% in 2028.  

Heightened economic uncertainty and household caution continue to weigh on spending decisions – even as incomes rise. The Outlook highlights that discretionary spending is likely to bear the brunt of this trend, compounding the challenging market conditions that many businesses in consumer-facing sectors have contended with since the pandemic.   

EY analysis suggests that the average UK household, with annual disposable income of around £36,700, has increased its savings rate from 7% in 2019 to 9% today, while the proportion of spending dedicated to ‘essential’ purchases in categories such as household energy, mortgages and rents has risen from 46% to 49%. This has caused the proportion of income allocated to discretionary spending to fall from 47% to 42%.  

Had this proportion remained at 47%, The Outlook indicates that UK households would today be spending an additional combined £78bn across discretionary purchases in categories such as clothing and footwear, restaurants and hotels, and recreation and culture. 

Higher income households, which make up a disproportionate share of consumer spending, has also shifted. The top two income quintiles, with median disposable incomes of at least £48,355, account for 56% of total UK consumer spending. Since 2019, the highest income quintile has raised its savings rate from 10% to 13%, while discretionary spending has declined from 50% to 44%. The second highest income quintile has increased savings from 8% to 9% over this time, while discretionary spending has fallen from 48% to 45%.  

How UK consumer spending in specific categories has shifted 

The rising prices of household energy, mortgages and rents since 2022 are driving a larger share of income being dedicated to essential spending. EY analysis shows that nominal spending on electricity, fuel and other utilities has risen by 41% since 2019. Mortgage interest payments have also increased sharply, rising by 28%, while rentals and housing nominal spending has grown by 20%. 

In contrast, EY identifies substantial real-term declines in discretionary categories, suggesting that in tight economic conditions households are spending less cash on these items (nominal spending) and also purchasing lower volumes (real spending). This is particularly pronounced in clothing and footwear (17% drop in nominal terms, -30% fall in real terms), restaurants and hotels (-11% in nominal, -30% in real), and food and non-alcoholic drinks (-8% in nominal, -9% in real). 

The recreation and culture category has seen 3% growth in nominal spending but a 13% fall in real spending, indicating that price increases may be prompting households to spending higher amounts in this area, but they are purchasing less frequently.