Its Winter Forecast predicts GDP growth of 0.9 per cent this year, a slight upgrade from the 0.8 per cent projected in November, before rising to 1.3 per cent in 2027 and stabilising at around 1.4 per cent from 2028. The outlook reflects persistent geopolitical uncertainty, trade disruption and tighter fiscal conditions.

While overall growth has been revised marginally higher, the forecast points to renewed weakness in corporate spending. Business investment is now expected to contract by 0.2 per cent in 2026, reversing earlier expectations of modest growth, as firms delay major decisions amid volatile global conditions.

The EY ITEM Club estimates that the economy expanded by 1.4 per cent in 2025, slightly below earlier forecasts, after slowing in the second half of the year.

Anna Anthony, UK and Ireland regional managing partner at EY, said uncertainty had intensified at the start of 2026. “Businesses continue to navigate turbulent market conditions and factor this into their spending plans,” she said, adding that investment was likely to remain subdued until confidence improved.

Recent revisions by the Office for National Statistics suggest business investment grew by 4.1 per cent in 2025, stronger than previously thought. However, EY expects this momentum to fade this year before rebounding to 1.7 per cent growth in 2027, supported by lower borrowing costs and relatively strong balance sheets.

Inflation is forecast to fall sharply in mid-2026, briefly reaching the Bank of England’s 2 per cent target, helped by lower utility bills. As a result, the EY ITEM Club expects the Monetary Policy Committee to cut interest rates once more in April, reducing Bank Rate to 3.5 per cent.

Matt Swannell, chief economic adviser to the EY ITEM Club, said tightening fiscal policy and global instability would continue to drag on growth. “The government will need to restrain borrowing and hold public spending steady to meet its fiscal rules,” he said, adding that this would limit short-term economic momentum.

The labour market is expected to soften further, with unemployment forecast to peak at 5.2 per cent in the first half of 2026 before easing gradually. Pay growth is projected to slow to around 3 per cent, contributing to weaker real income growth.

Consumer spending is forecast to rise by 1.1 per cent this year and next, supported by falling savings rates and improving confidence among higher earners, despite slowing wage growth.

House prices are expected to increase modestly by 1.7 per cent in 2026 before strengthening in 2027.

EY said the outlook for the next two years remains finely balanced between easing inflation and continued geopolitical and policy risks. Sustained growth, it concluded, will depend on restoring stability and confidence to support long-term investment decisions.