Middle East conflict to weigh on UK growth, EY warns

The UK economy’s growth is forecast to grow by 0.8% in 2026, falling from a previous forecast of 1.3%, as disruption to global energy supplies impacts national momentum and drives inflation higher, according to EY’s latest UK Economic Outlook. 

It comes as consumer spending is predicted to grow by 0.3% in 2026, significantly lower than the 0.9% growth forecast prior to the energy disruption.

The average UK household has also shifted its budget toward essentials, with discretionary spending on clothing, restaurants, and hotels seeing real-term declines. EY estimates that these categories are missing out on some £78bn. 

Analysis from EY suggests that GDP growth will remain subdued throughout the year. While growth is expected to rise to 1.2% in 2027, this still remains below the 1.4% rate predicted before the outbreak of conflict in the Middle East. 

Increased wholesale energy prices are expected to fuel higher domestic bills, pushing UK inflation above 4% by the end of December.

Business investment in the UK is forecast to remain flat this year as companies delay spending decisions due to heightened economic uncertainty.

In addition, it is anticipated that the Bank of England will hold the interest rate at 3.75% for the remainder of the year to combat rising prices. Analysts at EY previously anticipated two rate reductions in 2026, but the first cut is now unlikely to occur until April 2027.

Investment is expected to rise to 2% in 2027 and 3% in 2028 as lower interest rates eventually reduce the cost of capital.

However, unemployment is forecast to increase to 5.8% by the end of 2026 as weaker economic growth impacts national hiring levels.

High industrial electricity prices are estimated to be a £30bn drag on economic output, with energy-intensive sectors such as steel and chemicals most exposed.

Peter Arnold, chief economist at EY, said: “Despite a relatively strong start to 2026, the conflict in the Middle East means the UK economy is once again being shaped by external shocks and on track for another year of subdued growth.

“Energy supply constraints will push inflation higher and delay interest rate cuts, increasing the cost of borrowing for businesses and prompting some companies to reassess spending decisions.”