A return of economic uncertainty and geopolitical pressures is set to put the brakes on UK growth in the year ahead.

EY has warned global uncertainty and tariff disruptions are expected to be the leading drivers of this subdued growth and are predicted to weigh on private sector confidence.

It warned 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 said it 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.”

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, explained: “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.”

The EY ITEM Club added it 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.

The EY ITEM Club said it 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.