UK economic outlook upgraded but energy disruption will weigh on growth

• The EY UK Economic Outlook forecasts 0.9% GDP growth in 2026 and 1.2% in 2027.
• But if the Strait of Hormuz remains closed until 2027, UK GDP is expected to slow to 0.5% growth in 2026 and contract by 0.2% next year. 
• Weaker growth may increase the UK economy’s reliance on the services and technology sectors, which have driven 70% of UK GDP growth between 2020 and 2026.

The UK economy has demonstrated continued resilience despite disruption from the conflict in the Middle East and is now forecast to grow at a slightly better-than-expected pace in 2026, according to the new EY UK Economic Outlook.

The EY Economic Outlook now forecasts that UK GDP will grow by 0.9% in 2026, a slight increase from the 0.8% growth projected in May. GDP growth is then expected to rise to 1.2% in 2027, in line with the previous forecast.

The UK economy's performance in the second quarter of 2026 was better than previously anticipated as oil prices returned to pre-conflict levels more quickly than expected, preventing a more significant increase in inflation. However, the recent escalation of the conflict and disruption in the Strait of Hormuz and the subsequent impact on energy prices and inflation are projected to weigh on growth towards the end of the year, while a prolonged closure could cause the UK economy to contract next year.

The Outlook’s baseline forecast is based on the Strait of Hormuz reopening by the end of Q3 2026, albeit with subdued levels of tanker traffic. However, if there is an escalation in the conflict and the strait remains closed until early or mid-2027, the Outlook’s model suggests that UK GDP growth could fall to 0.5% this year and contract by 0.2% in 2027.

If the Strait of Hormuz reopens by Q3, UK inflation is forecast to rise to 3.5% by the end of the year. However, if the strait remains closed until at least early 2027, there is a risk that UK inflation could rise to 6.4% by the end of 2026.

The Outlook expects the Bank of England to hold the Bank Rate at 3.75% for the rest of 2026. The next reductions in interest rates are predicted to 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.

Anna Anthony, EY UK & Ireland Regional Managing Partner, said: "Prolonged global economic disruption continues to challenge UK companies and balancing short-term pressures with future growth ambitions needs to remain a boardroom priority. Businesses that continue to invest in productivity and technology during periods of uncertainty will be better placed to capitalise on market opportunities once conditions improve.

"Continued action to reduce structural cost pressures facing companies, including energy prices, should help to unlock the confidence and capital businesses need to invest longer term and drive economic growth.

“The UK will also need to draw on its sectoral strengths, with business services and technology set to remain significant growth drivers. The Government's Industrial Strategy offers an opportunity to amplify that contribution, and nurturing growth across all eight Strategy sectors will be critical to encouraging sustained investment.”

Subdued business and consumer spending expected to weigh on growth

With energy costs and inflation expected to remain higher for longer, business investment is now expected to fall by 0.7% in 2026, which represents a downgrade from the 0% forecast published in May.

Investment activity is projected to return to growth in 2027 and 2028, but the recovery is expected to be more gradual than previously forecast, with business investment growth revised down to 1.8% and 2.6% respectively.

Household expenditure is also forecast to remain subdued as households contend with higher prices and delayed interest rate cuts. Consumer spending is expected to grow by 0.3% in 2026 before improving to 0.9% in 2027.

Unemployment is forecast to increase slightly to 5.3% by the end of 2026 as weaker growth impacts hiring levels, before falling gradually to 5.1% by the end of next year and reaching 4.8% in 2028.

Peter Arnold, EY UK Chief Economist, said: “The UK economy has proved more resilient than many expected this year, prompting a modest upgrade to our growth forecast. Oil prices had started to fall back to pre-conflict levels and, while business and consumer confidence have softened, this decline remains less severe than the shock triggered by the 2022 energy crisis. Ongoing disruption to global energy markets will now start to test this economic resilience. If the Strait of Hormuz reopens in the coming months, we expect the UK to avoid a more pronounced downturn, but an extended closure into 2027 would raise inflation and could push the economy into contraction next year.

“As growth becomes harder to sustain, the UK is likely to rely increasingly on those sectors that have underpinned economic performance in recent years, particularly technology and high-value business services. At the same time, longstanding pressures in construction remain a concern. Rising project costs, persistent labour shortages and weak productivity growth risk constraining the delivery of major infrastructure projects at a time when demand remains high. Enhancing productivity in the sector will be critical if the UK is to deliver its infrastructure ambitions while supporting broader economic growth."

Service sectors offer UK a key growth engine

As economic pressures persist, the UK is expected to rely heavily on the industries that have been its strongest growth engines in recent years. The latest EY Economic Outlook finds that the high-value business services sector has become increasingly important to the UK economy since 2020.

Information and communication technology (ICT), together with professional, scientific and technical services, accounted for 70% of UK GDP growth between 2020 and 2026, adding almost £100bn to national output. The contribution of these sectors to UK GVA also grew more significant during this period, increasing from 12% to 16%.

This performance has been supported by strong growth in exports. Services exports have risen at an 8% Compound Annual Growth Rate (CAGR) since 2019, with professional services and finance and insurance exports increasing by 56% and 63% respectively over this period. By comparison, goods exports have grown by 12% since 2019.

Construction's supply pressures pose a challenge to infrastructure delivery

Elevated energy prices and persistent inflationary pressures continue to impact many businesses across the UK, with EY identifying the construction sector as particularly exposed, presenting a challenge to the UK’s infrastructure and housebuilding ambitions.

According to EY analysis, the average cost of new construction projects has risen by more than 30% since 2019 as supply chain disruptions and higher energy prices have driven costs ahead of inflation.

Labour shortages remain another persistent challenge. Construction is the only private-sector industry where vacancies remain above pre-pandemic levels, with unfilled roles in May 2026 standing 12% higher than in 2019. In comparison, the financial services, manufacturing and retail sectors have seen unfilled vacancies decline by 11%, 18% and 44% respectively.

EY analysis suggests that embracing new innovation and techniques, such as agentic AI and modular building, could improve productivity and help the sector better manage labour and material cost challenges. However, productivity in the sector has stagnated for decades, with the construction sector’s output per hour remaining at broadly the same level as in 1997. In comparison, the wider economy has seen output per hour rise by 34% over that period. The manufacturing sector, which has benefited from improvements in automation, has seen output per hour rise by 188% in comparison to 1997.