The British economy is poised for a significant slowdown this year, with a combination of international instability and domestic fiscal policy measures applying substantial pressure on corporate spending plans. According to a new economic forecast, this deceleration will result in markedly weaker growth than previously anticipated.
Bleak Growth Outlook for 2026
In a report that presents challenging reading for policymakers in Westminster, the influential EY Item Club has projected ‘subdued’ growth of just 0.9 per cent for the UK in 2026. This forecast represents a sharp downgrade from the 1.4 per cent expansion expected for 2025 and directly contradicts the Chancellor’s assertion that the nation is on the cusp of a decisive economic turnaround.
Forecast Falls Short of Treasury Expectations
The predicted growth rate is substantially weaker than the 1.3 per cent anticipated by the Treasury. Economists warn that this discrepancy could have serious fiscal consequences, likely resulting in a shortfall in anticipated tax revenues while simultaneously increasing pressure on welfare spending. This scenario threatens to undermine the Chancellor’s existing financial plans and could potentially necessitate further tax adjustments in an upcoming Budget.
Business Investment Set to Contract
A central concern highlighted by the report is the state of business investment. The Item Club now expects business investment to contract by 0.2 per cent this year, a stark reversal from its November forecast of a 0.8 per cent increase. This downward revision follows the government’s latest tax-raising Budget, indicating a direct link between fiscal policy and corporate caution.
The report identifies ‘global uncertainty and tariff disruption’ as the primary drivers of this weakened economic performance, noting their expected dampening effect on private sector confidence. It further states that domestic ‘fiscal policy’ – a clear reference to recent tax increases – alongside the conclusion of the interest rate-cutting cycle, are also significant factors contributing to the modest outlook for 2026.
Interest Rate and Business Confidence Insights
On monetary policy, the Item Club anticipates only one further interest rate cut, expected in April, which would bring the base rate down to 3.5 per cent. This signals a more cautious approach from the Bank of England as it navigates the competing pressures of inflation and growth.
Adding to the complex picture, a separate survey from the Institute of Directors (IoD) recorded a rebound in general business confidence at the start of the year. However, this optimism has not translated into concrete plans for hiring or capital expenditure.
‘Expectations for both headcount and investment remain in negative territory – marking the longest period of weakness in those areas of business spend in our survey’s history,’ explained Anna Leach, the IoD’s chief economist. ‘Overall, there’s a sense that, while revenues and general conditions have stabilised, businesses are not yet ready to increase either their capital or labour costs materially.’
This collective data paints a picture of an economy caught between stabilising conditions and a profound reluctance among businesses to commit to significant investment, setting the stage for a year of constrained growth and ongoing fiscal challenges for the government.
