While the start of 2025 appeared to show economic momentum building, the weaker global economy and market uncertainty created by trade disruption are expected to limit spending in the second and third quarters of this year as businesses and consumers become more cautious.

This caution is expected to continue into 2026 and will be combined with the longer-term effect of tariffs on businesses and consumers. The EY ITEM Club Spring Forecast assumes that the US will operate with an average tariff rate of more than 20% for much of the rest of the world, which is expected to make it challenging for some UK exports to reach key markets, whilst weakening goods demand and restraining growth.

The EY ITEM Club still expects the UK to return to more moderate levels of GDP growth of 1.5%, but this is now forecast to happen in 2027 rather than in 2026.

Trade and market uncertainty set to subdue business investment
Business investment in the UK is now predicted to be weaker than previously expected over the next two years. This is primarily due to the effect of unpredictable international trading arrangements and high levels of uncertainty in the global economic market. 

To a lesser extent, business investment is also expected to soften due to the elevated labour costs facing companies from increases to the National Living Wage and rising employer National Insurance Contributions, which came into force in April this year. 

The UK is now projected to see modest business investment growth of 0.3% in 2025 and 1% in 2026, downgraded from the 2% and 1.8% predicted in February’s Winter Forecast. 

However, gradual cuts to interest rates over the next year should support capital expenditure growth further into the future, with business investment predicted to rise to 1.8% in 2027. 

Anna Anthony, EY UK & Ireland Regional Managing Partner, said: “There had been signs that the economy was exceeding expectations in the opening months of 2025, but a combination of global trade disruption, uncertainty and persistent inflation look likely to postpone the UK’s return to more moderate levels of growth. Businesses thrive on certainty, so it’s unsurprising that an unpredictable global market is translating into lower levels of business investment over the short term. 

“While conditions remain challenging, there are still some grounds for optimism. The services-led UK economy is projected to see continued growth this year and gradual interest rate cuts should slowly bolster business and household spending. Over time, the unpredictable global landscape may offer opportunities for the UK to position itself as a stable, attractive destination for investment. Policymakers will need to seize these opportunities swiftly, while also maintaining a predictable and transparent policy environment that enables businesses to plan with confidence.”