The UK's economic outlook has darkened significantly according to the latest forecast from the EY Item Club, which has sharply downgraded its growth predictions for the coming years. The respected economic forecasting group points to a worrying decline in business investment as the primary culprit, driven largely by recent tax increases and policy uncertainty.
Investment Exodus Threatens Recovery
Business investment is projected to fall by 2% this year and remain stagnant in 2026, marking a dramatic reversal from previous expectations of growth. This investment strike comes as companies grapple with higher corporation tax and the scaling back of capital allowances, creating what experts describe as a "chilling effect" on business expansion plans.
The Tax Factor
The decision to maintain corporation tax at 25% while reducing the generosity of the "full expensing" regime has created a perfect storm for British businesses. Many companies that had been planning significant investments are now reconsidering their options, with some putting projects on hold indefinitely.
Key Concerns for Businesses
- Corporation tax remaining at 25% instead of returning to 19%
- Reduced capital allowances making investment less attractive
- Ongoing economic uncertainty affecting long-term planning
- Concerns about future policy changes under potential new government
Growth Forecasts Cut Across the Board
The EY Item Club has revised its growth predictions downward for both 2025 and 2026, with the economy now expected to expand at a much more modest pace than previously anticipated. This slowdown comes despite expectations of falling inflation and potential interest rate cuts, suggesting deeper structural issues at play.
Revised Economic Projections
Previous forecasts had painted a more optimistic picture of Britain's recovery, but the latest data suggests the economy is struggling to gain momentum. The combination of weak investment, cautious consumer spending, and global economic headwinds is creating significant challenges for policymakers.
Broader Economic Implications
The investment downturn threatens to create a vicious cycle for the UK economy. Without sufficient business investment, productivity growth is likely to remain weak, which in turn could limit wage growth and living standards. This comes at a time when many households are already feeling the pinch from the cost of living crisis.
What This Means for the Future
Economists warn that unless the investment climate improves, the UK risks falling behind international competitors and facing a prolonged period of sluggish growth. The situation underscores the delicate balance policymakers must strike between fiscal responsibility and creating conditions conducive to business investment.
The coming months will be crucial in determining whether the current investment slowdown proves temporary or marks the beginning of a more sustained period of economic weakness for Britain.
