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The EY ITEM Club has upgraded its forecast for UK gross domestic product (GDP) growth in 2025 from 0.8% to 1.0%, following a stronger-than-expected start to the year.
However, the Summer Forecast published in July warns that persistent global economic uncertainty, tighter fiscal policy, a weakening labour market and the lagged effects of high interest rates will continue to weigh on momentum. These factors are expected to delay the UK’s return to more stable growth.
Growth is now projected to remain subdued at 0.9% in 2026, before rising to 1.5% in 2027 – matching the club’s Spring Forecast published in April.
A strong first quarter, driven by a 3.9% rise in business investment, contributed to the improved outlook. This surge is believed to reflect companies accelerating spending decisions ahead of the introduction of US tariffs in April.
As a result, the EY ITEM Club has upgraded its business investment growth forecast for 2025 to 1.3%, up from 0.3%. However, the report cautions that this momentum is unlikely to continue into the second half of the year or into 2026, as tariffs and heightened uncertainty prompt businesses to hold back on spending.
Business investment is now expected to flatline at 0.0% in 2026 – down from a 1.0% forecast in April – before rebounding to 1.8% in 2027.
It added that inflation is expected to remain above 3% for the rest of 2025 and average 3.4% over the year – up from 3.0% in April’s forecast. This is driven by rising household energy bills and increased labour costs, including higher National Living Wage rates and employers’ National Insurance contributions.
Headline inflation is forecast to fall to 2.6% in 2026 and reach the Bank of England’s 2.0% target in the second half of that year, as a softer labour market and easing wage growth bring down services inflation. Unemployment is expected to rise from 4.7% to 5.0% by the end of 2025, before falling to 4.5% by the end of 2027. Slower hiring, rather than large-scale layoffs, is predicted to drive this temporary increase.
Meanwhile, pay growth is also expected to slow, falling to 3.5% by the end of 2025 and to 3.0% in the second half of 2026.
EY added that weak growth, rising unemployment and easing pay pressures are likely to prompt the Bank of England to continue its gradual approach to interest rate cuts. The EY ITEM Club expects two further 25 basis point cuts in 2025 – one in August and one in November – followed by another in February 2026. This would bring the Bank Rate down to 3.50%, where it is expected to remain for the near term.
Lower interest rates are forecast to support a gradual rise in business investment later in 2026, although servicing costs will remain higher than during the 2010–2019 period, limiting the scale of the recovery.
Anna Anthony, EY UK and Ireland regional managing partner, said: “After a strong start to the year, uncertainty in the global economy and international trade policy has continued to slow momentum. While the agreement struck with the US offers welcome relief to certain sectors and boosts the trading outlook, the UK’s access to a key export market is still reduced from where it was at the start of 2025, which is likely to weigh on growth.
“Business investment is expected to remain modest until 2027 and while interest rate cuts should reduce debt service costs and make financing cheaper, this will take time to materialise. Until then, businesses face a period of international uncertainty, alongside elevated labour and energy costs. Stimulating greater economic growth through business investment will require policy measures that actively incentivise companies to spend, even under challenging conditions.”
Consumer spending is expected to rise by 0.9% this year, constrained by weak real income growth and economic uncertainty. A modest improvement is forecast for 2026, with spending growth rising to 1.1% as consumer confidence begins to recover.
House prices are expected to increase by 3.5% in 2025, slowing to 2.5% in 2026. Planning reforms and falling interest rates are expected to support the housing market, although high construction costs and labour shortages will likely limit the pace of housebuilding.
