A new report from the EY Item Club forecasts a significant deceleration in the UK’s economic growth for 2026, predicting a mere 0.9% increase in GDP. This decline, attributed to ongoing tax increases and spending reductions, marks a stark contrast to the previously anticipated growth rates.
GDP Growth Projections Adjusted
The EY Item Club’s latest quarterly economic outlook reveals a minor upgrade from its earlier projection of 0.8% growth, but it still signifies a drop from the expected 1.4% for 2025. As the economic landscape becomes increasingly challenging, the report highlights the mounting pressures on businesses and households alike.
Investment Decline Expected
In addition to sluggish GDP growth, business investment is set to contract by 0.2% in 2026. This represents a sharp reversal from the previously forecasted 0.8% growth, reflecting concerns over global economic uncertainty and internal fiscal pressures. Matt Swannell, chief economic adviser to the EY Item Club, pointed out that while the autumn budget provided some fiscal breathing room, the effects of tax hikes will start becoming more pronounced in the near future.
“The tightening of fiscal policy, alongside ongoing global uncertainty, is expected to drag on UK growth over the next year or so,” Swannell noted.
Impending Interest Rate Decisions
As anticipation builds for the Bank of England’s upcoming interest rate decision, which is expected to maintain the current rate at 3.75%, the EY Item Club predicts one additional rate cut later this year, likely in April. This adjustment is projected to accompany a decrease in inflation, potentially reaching the target of 2% by mid-year. Such measures may offer slight relief to homeowners and businesses, but the broader economic outlook remains bleak, especially with rising unemployment on the horizon.
Swannell added, “Easing inflation and falling interest rates should improve consumer sentiment, but this will be countered by slowing pay growth and rising unemployment levels.”
Consumer Spending Amid Economic Strain
Despite these challenges, the report suggests that a widening confidence gap between high and low earners could lead to sustained consumer spending growth, albeit at a modest rate. High earners may start to feel more optimistic, which could soften the impact of decreasing real incomes on overall consumer behaviour.
This complex interplay of economic factors indicates that while some households might contribute to continued spending, the overall economic environment remains fragile and uncertain.
Why it Matters
The findings from the EY Item Club serve as a wake-up call for policymakers and businesses alike. With growth projected to stall and investment retracting, the UK faces a challenging economic landscape that could dampen recovery prospects. As fiscal policies tighten and global uncertainties persist, understanding these dynamics will be crucial for navigating the future of the UK economy and ensuring resilience in the face of adversity.
