Introduction
The UK’s economic growth is about to hit the brakes. New forecasts from EY predict UK GDP growth will slow to just 0.9% in 2026—down from 1.4% last year—as last autumn’s £26bn tax hikes start filtering through the economy. Add ongoing fears about global trade wars into the mix, and you’ve got a recipe for another year of sluggish momentum. So what’s dragging Britain’s growth down, and when might things pick up again?
Why UK GDP Growth Is Slowing Down
The Budget Tax Hikes Are Kicking In
Remember those chunky tax rises announced in the Budget? They’re about to make themselves felt. The government unveiled £26bn in tax increases that’ll push the overall tax take to 38% of GDP by decade’s end—the highest level in generations.
Matt Swannell, chief economic adviser to the EY ITEM Club, explains the squeeze: “Further tax rises may not be expected in 2026, but previously announced measures will begin to raise revenues, while the government will need to reduce borrowing and keep public spending steady in order to meet its fiscal rules.”
Translation? Tighter fiscal policy equals slower growth.
Global Trade Uncertainty Isn’t Helping
It’s not just domestic policy weighing on the UK economy. Businesses are also navigating choppy international waters, particularly around trade.
Donald Trump’s tariff threats—remember the Greenland saga?—have kept boardrooms on edge, even though the President eventually backed down. But last year’s tariffs are already causing real damage: a Make UK survey found 20% of factories have stopped or reduced exports to the US.
When global conditions are this volatile, businesses hit pause on big spending decisions. And that brings us to the investment problem.
Business Investment Expected to Fall
Back in November, EY thought business investment would rise 0.8% this year. Now? They’re predicting it’ll actually fall 0.2% in 2026.
Anna Anthony, UK and Ireland regional managing partner at EY, points to the “increasingly volatile macroeconomic environment” as the culprit. “The start of 2026 has seen this uncertainty intensify once again, highlighting the turbulent market conditions that businesses continue to navigate and factor into their spending plans,” she said.
It’s a classic wait-and-see moment. When you don’t know if another round of tariffs is coming or how tax policy might shift, why commit millions to new projects?
When Will Things Improve?
Investment Rebound Expected in 2027
There’s a silver lining: EY forecasts business investment will bounce back 1.7% in 2027. The drivers? Further interest rate cuts from the Bank of England and the continued strength of corporate balance sheets.
Companies aren’t broke—they’re just cautious. Once the fog clears a bit, the money’s there to deploy.
What the Government Needs to Do
Anthony’s prescription for ministers is straightforward: “embed stability” into the UK economy. “Maintaining a steady, transparent and growth-oriented policy environment will build on the UK’s strengths as a stable, attractive investment destination in an otherwise unpredictable global landscape,” she said.
In other words, stop moving the goalposts. Businesses can handle challenges—they just need to know what the rules are.
The Bottom Line
The UK’s facing another year of underwhelming economic growth as Budget tax hikes and global trade uncertainty weigh on momentum. With business investment expected to contract in 2026 before recovering in 2027, the government’s challenge is clear: create the stability businesses need to plan and invest for the long term.
Want to track UK economic forecasts? Keep an eye on quarterly updates from the EY ITEM Club and Bank of England policy decisions—they’ll shape whether 2027’s rebound actually materialises.
FAQ
Q1: What is the UK GDP growth forecast for 2026?
A: EY predicts UK GDP will grow just 0.9% in 2026, down from 1.4% in the previous year. The slowdown is driven by Budget tax hikes and global economic uncertainty affecting business confidence and investment.
Q2: Why is business investment expected to fall in 2026?
A: Investment is forecast to drop 0.2% this year (revised down from an earlier 0.8% growth prediction) due to volatile global conditions, particularly trade war fears and tariff disruptions. Businesses are delaying major spending decisions until there’s greater clarity.
Q3: How much did the UK government raise taxes in the Budget?
A: The government announced £26bn in tax rises, pushing the overall tax take to 38% of GDP by the end of the decade—one of the highest levels in modern UK history.
Q4: When will UK business investment recover?
A: EY expects business investment to rebound 1.7% in 2027, supported by further Bank of England interest rate cuts and strong corporate balance sheets. The recovery depends on improved global stability and clearer domestic policy direction.
Q5: How are US tariffs affecting UK businesses?
A: Recent Make UK survey data shows 20% of UK factories have stopped or reduced exports to the United States following tariff implementation. This trade disruption is contributing to broader business uncertainty and dampening investment appetite.
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Effective Date: 15th July 2025
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