Trade uncertainty to hit growth for next two years

Forecasters have downgraded expectations by 0.2% to 0.8% for the remainder of this year, while their 2026 forecasts have fallen from 1.6% to 0.9%. More concerning still, business investments have seen a massive 1.7% downgrade for 2025 – dropping from 2% to just 0.3%.

They do, however, still expect the UK to return to more moderate levels of GDP growth of 1.5% – but this will happen in 2027 rather than 2026.

EY UK and Ireland’s Regional Managing Partner Anna Anthony 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."

It comes as no surprise that a significant driver of this trade disruption stems from tariffs imposed by the US – with UK exports expected to fall by around 0.5% in 2025 and 0.4% in 2026.

Additionally, even if the UK were subject to no changes beyond the current 10% tariff, continued trade escalation between large third-party nations is still likely to have an indirect impact on UK growth by weakening the global economy.

Reflecting on this, EY ITEM Club’s Chief Economic Advisor Matt Swannell said: "US tariffs will act as a drag on UK growth and we’re likely to see a slowdown in economic activity from the second quarter of this year through to early next year.

"We’re expecting an initial phase of uncertainty that will hold back demand, followed by the direct impact on goods exports as the US and other trading partners are less likely to buy in a weakened global economy. If interest rates remain high by historic standards, these factors may see the cost of capital continue to rise for many firms.

"The inflationary effect of tariffs on the UK is less certain but, on balance, we expect it to weigh on inflation. Falls in energy prices should, if sustained, translate into lower costs for consumers, while UK importers may also benefit from lower prices as Chinese and European exporters look to access alternative markets to the US.

"But the pandemic demonstrated that disruption to the cross-border flow of goods can have a powerful effect on inflation and it’s possible that the impact of tariffs may ripple through international supply chains and put upwards pressure on UK goods prices.

"Overall, we expect inflation to remain sticky as labour costs remain elevated, before falling back towards 2% next year as the effect of higher labour costs begins to fade."