The UK economy is facing a period of subdued growth, with leading economic forecasters warning that global instability and changes to tax policy are likely to dampen business investment in the year ahead. A new report released by the EY ITEM Club projects the UK will see economic growth of only 0.9% in 2026, a significant slowdown from the 1.4% expansion observed in 2025.
These figures, which have been independently verified, suggest that earlier claims of a strong economic turnaround may have been overly optimistic. The forecast is also notably below the government’s estimate of 1.3%, raising concerns over future public finances and the direction of fiscal policy.
Economic growth outlook for 2026
The EY ITEM Club, a well-regarded independent economic forecasting group, has lowered its forecast for UK GDP growth in 2026 to just 0.9%. This represents a pronounced slowdown when compared with the 1.4% recorded during 2025.
The downgrade puts additional pressure on government communications that had indicated expectations for a rebound in the nation’s economic performance.
Forecasts challenge government optimism
The government had indicated hope that 2026 would mark a turning point for the economy, with Chancellor Rachel Reeves suggesting that the UK was poised for more robust recovery.
However, with growth projections now trailing official estimates, scrutiny is likely to intensify over the government’s fiscal targets and promises. Analysts have pointed out that slower growth may lead to a shortfall in predicted tax receipts, which could in turn necessitate difficult decisions on spending or taxation later in the year.
Business investment expected to decline
According to the EY ITEM Club report, business investment is forecast to contract by 0.2% during the current year. This marks a substantial reversal from the 0.8% growth predicted as recently as
November, before the introduction of new tax measures and the latest Budget. The anticipated decline in investment comes despite some lingering optimism in the private sector at the start of the year.
Key factors affecting economic prospects
The report highlights global economic uncertainty and disruption to trade as major contributors to weakened prospects. Increased tariffs and international tensions are expected to weigh on business confidence.
In addition, fiscal policy specifically recent tax increases and the projected end of the current interest rate-cutting cycle are cited as factors likely to inhibit economic activity in 2026.
Monetary policy and interest rates
Monetary policy remains highly relevant to the UK’s economic outlook. The EY ITEM Club expects the Bank of England to implement only one further interest rate reduction in April, lowering the benchmark rate to 3.5%.
This signals the conclusion of an extended period of monetary easing and suggests that borrowing costs for businesses and consumers may begin to stabilise.
Final Summary
The latest set of independent forecasts signals a more cautious outlook for the UK economy in 2026, with both global developments and domestic policy changes acting as constraints.
The reduction in expected growth from 1.4% to 0.9%, combined with declining business investment and persistent uncertainty, will require policymakers to reconsider their approach as the year progresses.
As economic confidence struggles to translate into real investment and job creation, close attention to fiscal and monetary developments will be critical.
For stakeholders monitoring these trends, tools that offer timely data and insight, such as the Pie app, may prove valuable in navigating an increasingly challenging business environment.
