EY summer forecast: early sunshine, weaker growth later

The EY ITEM Club’s Summer Forecast has upgraded UK GDP growth for 2025 to 1%, up from 0.8% predicted in April.

While the revision reflects a stronger-than-expected start to the year, the report warns that global uncertainty, weakening labour markets, and the impact of higher interest rates will keep economic momentum subdued through 2027.

Growth Driven by Early-Year Investment

The economy expanded strongly in the first quarter of 2025, supported by a 3.9% surge in business investment. This was partly attributed to companies accelerating spending ahead of US tariffs introduced in April.

As a result, business investment growth is forecast to reach 1.3% this year, compared with the 0.3% predicted in the Spring Forecast.

The outlook for investment beyond 2025 is less positive. The report expects growth to stall at 0% in 2026 as uncertainty over trade policy and tariff impacts prompts firms to delay decisions. A modest rebound to 1.8% is projected in 2027.

Anna Anthony, EY UK & Ireland Regional Managing Partner, said:

“After a strong start to the year, uncertainty in the global economy and international trade policy has continued to slow momentum. While the agreement struck with the US offers welcome relief to certain sectors and boosts the trading outlook, the UK’s access to a key export market is still reduced from where it was at the start of 2025, which is likely to weigh on growth.”

Inflation and Interest Rates

Inflation is expected to remain elevated, averaging 3.4% in 2025, driven by higher household energy bills and labour costs. The rate is forecast to fall to 2.6% in 2026 and reach the Bank of England’s 2% target in the second half of that year as wage pressures ease.

The forecast anticipates two interest rate cuts of 25 basis points this year—in August and November—followed by another in early 2026. This would bring the Bank Rate down to 3.5%, where it is expected to remain for some time.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said:

“While the MPC appears more concerned about cutting interest rates too quickly rather than too slowly, a softening job market and cooling pay growth should provide reassurance that domestic inflationary pressures are set to fade, albeit gradually.”

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Labour Market Pressures

Labour market conditions are expected to deteriorate slightly, with unemployment rising from 4.7% to 5% by the end of 2025 before easing to 4.5% by 2027. Pay growth is forecast to slow to 3.5% by the end of 2025 and 3% in 2026.

Swannell noted that the rise in unemployment is likely to be modest.

“The number of employed people across the UK has fallen in recent months and the jobs market is expected to continue its slowdown into next year as businesses contend with weak economic growth and increases in the National Living Wage and employers’ National Insurance Contributions. However, the rise in unemployment is expected to be relatively modest, with a slowdown in hiring more likely than large-scale layoffs.”

Consumer Spending and Housing

Household spending is expected to rise by 0.9% in 2025, reflecting continued caution among consumers amid economic uncertainty and slower real income growth. A slight improvement to 1.1% is forecast for 2026 as confidence recovers.

House price growth is projected to moderate from 3.5% this year to 2.5% in 2026. Planning reforms and lower interest rates are expected to support housing market activity, though elevated construction costs and labour shortages may limit progress.

Outlook

Despite the upgraded GDP forecast, EY ITEM Club’s report points to a subdued recovery over the next two years. Tight fiscal conditions, lingering effects of higher interest rates, and global trade tensions are expected to constrain growth.

Anthony said that stimulating investment will require policy action:

“Business investment is expected to remain modest until 2027 and while interest rate cuts should reduce debt service costs and make financing cheaper, this will take time to materialise. Stimulating greater economic growth through business investment will require policy measures that actively incentivise companies to spend, even under challenging conditions.”