LONDON – The UK economy will grow half as quickly as previously expected in 2026 as Donald Trump’s sweeping tariffs hit business investment, according to EY Item Club.
The influential forecaster warned of shrinking exports and more subdued household spending that will snuff out the strong pickup in growth previously projected.
EY Item Club – which uses the UK Treasury’s economic model for its forecasts – downgraded its growth prediction for 2025 to 0.8 per cent from 1 per cent and slashed its 2026 projection to 0.9 per cent from 1.6 per cent. Business investment is expected to be particularly badly hit, barely expanding this year. Exports are expected to fall this year and next.
The darkening economic outlook is a major headache for Chancellor of the Exchequer Rachel Reeves, with her fiscals plans predicated on the economy growing almost 2 per cent in 2026 and delivering similar rates in the following years.
There were signs of growth gathering pace in the first quarter. However, purchasing manager’s index and consumer confidence surveys suggest a sharp deterioration in April after Trump launched an all-out trade war that threatens a major shock to the global economy. Last week, the International Monetary Fund cut UK growth prospects over the next two years by more than any leading European nation.
The downgrades significantly raise the risk that Ms Reeves will need to either increase taxes or cut spending to stay on track to meet her fiscal rules.
“A combination of global trade disruption, uncertainty and persistent inflation look likely to postpone the UK’s return to more moderate levels of growth,” said Ms Anna Anthony, EY UK & Ireland regional managing partner. “It’s unsurprising that an unpredictable global market is translating into lower levels of business investment over the short term.”
While most UK goods face the baseline 10 per cent US tariff, growth is expected to be sapped as trade is disrupted, firms put off investment and consumers hesitate to spend. EY Item Club cut its forecast for household spending growth this year to 0.9 per cent from 1.6 per cent. Business investment, previously forecast to grow 2 per cent, will now expand just 0.3 per cent. Exports are predicted to fall 0.5 per cent in 2025 and 0.4 per cent in 2026.
It nevertheless expects the Bank of England to stick to its gradual once-a-quarter interest-rate cutting cycle. While a faster pace of easing “remains a possibility,” it warned that inflation will hold above 3 per cent for most of 2025. BLOOMBERG
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