The UK’s economic growth is now forecast to slip below 1 % next year as the combination of rising taxes and collapsing business investment weighs on momentum. A recent assessment by the consultancy EY ITEM Club pointed to a sluggish 0.9 % expansion for 2026, warning that the country’s lacklustre performance will limit tax receipts and squeeze the government’s room for manoeuvre.
With just under four weeks until Rachel Reeves delivers the Budget on 26 November, the picture is becoming more constrained. The UK’s independent forecaster, the Office for Budget Responsibility (OBR), is expected to revise down the country’s potential growth rate and productivity outlook — a move that could reduce government income by around £21 billion before the next Parliament ends.
Business investment collapse and labour worries
Business investment — which boosted growth substantially this year — is forecast to fall sharply. The EY ITEM Club expects investment growth to drop from 3.7 % in 2025 to just 0.8 % in 2026. At the same time, unemployment is predicted to hit 5 % next summer, driving earnings growth down to about 3.0 % by mid-2026.
Confidence crisis among business leaders
The fall in business investment is underpinned by a slump in sentiment. A survey by the Institute of Directors found confidence among UK business leaders at a record low of -74 in September, edging only slightly to -73 in October. Many companies report shortened planning horizons, hiring freezes, and deferred spending amid uncertainty about tax and regulation.
Global and domestic headwinds persist
Analysts at EY highlight the convergence of multiple headwinds: potential tax rises, international trade disruption, and prolonged high interest rates. These factors combine to “put a brake on economic momentum and produce modest growth over the next year,” according to chief economic adviser Matt Swannell.
Why it matters
A growth rate under 1 % signals a marked departure from trend performance and raises serious questions for policymakers. Sluggish expansion limits the ability to raise living standards, leaves the public finances under strain, and heightens the risk of long-term productivity stagnation. For investors and businesses alike, the weak outlook reinforces caution on expansion plans and hiring.
Earlier this year, the UK looked to be recovering: the EY ITEM Club upgraded the 2025 growth forecast from 1.0 % to 1.5 % after a stronger-than-expected first half of the year. However, the momentum is fading, and productivity growth remains weak — a long-standing structural issue for the UK economy. Surveys of business sentiment and investment plans point to a retrenchment ahead. Meanwhile, global challenges such as supply-chain disruption and geopolitical risks continue to weigh on outlooks.
