UK economy set for modest growth in 2026 amid global uncertainty

• The EY ITEM Club Winter Forecast predicts UK GDP growth of 0.9% this year, a small upgrade on the 0.8% projected in November. 
• Business investment in 2026 is forecast to contract by 0.2%, down from the 0.8% growth predicted in November. 
• With inflation expected to briefly meet 2% target by mid-2026 and settle in 2027, one further Bank Rate cut is forecast for April this year.

The UK economy is expected to grow modestly in 2026 as persistent global uncertainty leads to a contraction in business investment this year, according to the EY ITEM Club Winter Forecast.

The EY ITEM Club expects UK GDP to grow by 0.9% in 2026, a marginal upgrade on the 0.8% predicted in November’s Autumn Forecast, before accelerating to 1.3% in 2027 and settling at 1.4% from 2028 onwards. 

Global uncertainty and tariff disruption are expected to be the leading drivers of this subdued growth and are predicted to weigh on private sector confidence. Tightening fiscal policy and an anticipated end to the cycle of interest rate cuts are also expected to contribute to the modest economic outlook for 2026, although these are forecast to exert less influence than volatility in the global market.   

The EY ITEM Club expects UK GDP to have grown by 1.4% across 2025 as a whole - a marginal decrease from the 1.5% forecast in November’s Autumn Forecast after a weaker-than-expected performance through the summer.

Anna Anthony, EY UK & Ireland Regional Managing Partner, said: “While momentum slowed in the second half of 2025, it still marked the UK’s fastest year of growth since 2022, despite a volatile global macroeconomic environment. The start of 2026 has seen this uncertainty intensify once again, highlighting the turbulent market conditions that businesses continue to navigate and factor into their spending plans. 

“Private sector investment is expected to contract this year, keeping UK growth subdued. However, a further reduction in interest rates should bring down the cost of finance and support a rebound in business spending next year. In the meantime, businesses will be looking to policymakers to further embed stability into the UK economy to support longer term planning and investment decisions. Maintaining a steady, transparent and growth-oriented policy environment will build on the UK’s strengths as a stable, attractive investment destination in an otherwise unpredictable global landscape.”

Global uncertainty set to subdue business investment

Recent data revisions by the Office for National Statistics suggest that business investment in 2025 was stronger than previously thought, growing by 4.1% last year. Despite this, uncertainty over the domestic and international economic outlook is expected to slow levels of business investment in 2026. 

The EY ITEM Club now expects UK business investment growth to shrink by 0.2% in 2026, a downward adjustment from the 0.8% growth predicted in November’s Autumn Forecast. However, the reduced cost of borrowing following the Bank of England’s cuts to interest rates and robust corporate balance sheets are projected to provide a launchpad for business investment to rebound to 1.7% growth in 2027.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, says: “The Autumn Budget saw the Government build a healthier degree of fiscal headroom, although some of the more substantial measures won’t take effect for a couple years. In the meantime, further tax rises may not be expected in 2026, but previously announced measures will begin to raise revenues, while the government will need to reduce borrowing and keep public spending steady in order to meet its fiscal rules. This tightening of fiscal policy, alongside ongoing global uncertainty, is expected to drag on UK growth over the next year or so.

“Easing inflation and falling interest rates should improve consumer sentiment, but this will be countered by slowing pay growth and rising unemployment levels. Nonetheless, the current confidence gap between high and low earners is unusually wide and, as households on greater pay start to feel more upbeat, we can expect slowing real income to be cushioned by a reduced focus on saving. This should support continued consumer spending growth this year and next, albeit at a modest level.”

Decline in UK jobs market expected to continue as public sector headcount falls

Modest GDP growth and elevated business costs have seen the UK labour market loosen over the last year, with unemployment rising to 5.1% in November. The jobs market is expected to deteriorate slightly further, with unemployment forecast to peak at 5.2% in the first half of 2026 due to a slowdown in economic momentum and a reduction in public sector headcount. Unemployment is then forecast to gradually fall back to 4.7% by 2028. 

Pay growth is expected to slow to around 3% this year following the initial impact of increased employer National Insurance Contributions (NICs) and as businesses adapt to a more favourable hiring market. This deceleration in pay growth, alongside rising unemployment and frozen income tax thresholds, is also forecast to slow real income growth from 1% last year to 0.8% in 2026. 

UK consumer spending forecast climbs marginally, with household savings expected to slow

The UK is expected to see consumer spending grow by 1.1% this year, up slightly from the 0.9% projected in November’s Autumn Forecast. Consumer spending is then anticipated to rise by 1.1% again in 2027. This is predicted to be driven in part by increasingly confident higher earners, with data showing that this group grew more optimistic about the economy throughout 2025 and are now more willing to spend, despite slowing levels of pay growth. 

Spending will also be supported by the continued gradual slowdown in the household saving rate, which is expected to fall from around 10% to 9% as consumers choose to part with an larger proportion of their pay packets. While this remains slightly above the long-run average of 8.2%, it represents a consistent fall from the peak 11% recorded in 2024. 

UK inflation expected to fall sharply in mid-2026, with interest rate cuts predicted for April 

December’s pickup in CPI inflation is expected to be temporary and driven primarily by a rise in air travel over the festive period, as well as the increase in tobacco duty taking effect. 

The EY ITEM Club expects inflation to briefly stabilise to the Bank of England’s 2% target by mid-2026, as measures to reduce utility bills are implemented in April. As this initial effect fades, inflation is projected to temporarily rise again, before slowing pay growth causes it to settle at 2% towards the end of 2027. 

The Monetary Policy Committee (MPC) indicated at its December meeting that it was unlikely to change its cautious approach to interest rate cuts, and December’s outturns for CPI and services inflation aren’t expected to cause the Committee to alter its approach. 

With inflation and pay growth both currently above levels consistent with reaching the MPC’s target for 2% inflation, the EY ITEM Club expects the Committee to wait until April before making its next cut, reducing Bank Rate to 3.5% as inflation slows.

UK house prices expected to see modest growth in 2026

With strong pay growth and relatively small rises in property prices over the last couple of years, most of the improvements in housing affordability have now passed. House prices are expected to see modest growth of 1.7% this year, following a subdued end to 2025, before picking back up and settling around 4% in 2027.