The UK’s economic growth might be “delayed” for two years due to a combination of unfavorable factors affecting confidence, according to a reputable forecast that suggests further interest rate reductions could help improve sentiment.
EY ITEM Club, which employs the Treasury’s economic modelling, has revised its output expectations downward for both 2025 and 2026 in its recent report.
It highlights the direct impact of Donald Trump’s trade conflict and the persistent high inflation affecting the UK economy.
However, the forecast indicates that the most significant effect will stem from diminished confidence among households and businesses, driven by increased uncertainty and global growth challenges arising from tariffs.
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A standard 10% tariff on imports from many countries is in effect, while UK-made steel, aluminium, and cars face duties of 25%.
Typically, around 16% of all UK exports are destined for the United States, but the analysis suggests that weakened export demand could lower this percentage.
Forecasts indicate UK growth of 0.8% this year, a decrease from the 1% anticipated three months earlier, and a figure of 0.9% for 2026, reflecting a downgrade of 0.6 percentage points.
These numbers are not what the Treasury would prefer to see, being even lower than the International Monetary Fund’s recent revisions, as it works on the government’s goal of ensuring economic growth.
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What IMF said about the economy
The chancellor has faced criticism for tax increases on businesses that took effect at the start of this month.
Meanwhile, households are dealing with skyrocketing costs for essentials like energy, water, and council tax, which threaten to further reduce their spending capacity.
Recent data indicated a renewed decline in consumer confidence and a significant rise in the number of businesses facing “critical” financial difficulties or closures.
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EY noted that the deteriorating global economic climate and rising uncertainty would impact both families and businesses.
It cautioned that consumer sentiment remains “cautious” due to ongoing financial strain on household budgets, which further restricts demand for significant purchases.
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Anna Anthony, regional managing partner for EY UK & Ireland, stated: “There were signs that the economy was exceeding expectations in early 2025, but a mix of global trade disruptions, uncertainty, and persistent inflation appears poised to delay the UK’s return to more moderate growth levels.
“Businesses prosper when there is certainty, making it unsurprising that an unpredictable global market is resulting in decreased business investment in the short term.
“While the current environment remains difficult, there are still some positive factors to consider.
“The UK’s service-driven economy is expected to maintain growth this year, and gradual interest rate reductions should eventually enhance both business and household spending.
“Over time, the unpredictable global landscape may present opportunities for the UK to establish itself as a stable and attractive destination for investment.”