EY Item Club slashes UK growth forecasts
By Michele Maatouk
Date: Monday 28 Apr 2025
(Sharecast News) - The EY Item Club downgraded its UK economic growth expectations for this year and the next on Monday, citing trade disruption and "persistent" inflation.
The leading forecaster now expects GDP growth of 0.8% this year, down from a forecast of 1% growth in February, while its 2026 growth forecast was downgraded to 0.9% from 1.6%.
"While the start of 2025 appeared to show economic momentum building, the weaker global economy and market uncertainty created by trade disruption are expected to limit spending in the second and third quarters of this year as businesses and consumers become more cautious," it said.
This caution is expected to continue into next year and will be combined with the longer-term effect of tariffs on businesses and consumers.
The EY ITEM Club's Spring Forecast assumes that the US will operate with an average tariff rate of more than 20% for much of the rest of the world. This is expected to make it challenging for some UK exports to reach key markets, while weakening goods demand and restraining growth.
The forecaster still expects the UK to return to more moderate levels of GDP growth of 1.5%, but this is now seen happening in 2027 rather than in 2026.
Matt Swannell, chief economic advisor to the EY ITEM Club, said: "US tariffs will act as a drag on UK growth and we're likely to see a slowdown in economic activity from the second quarter of this year through to early next year. We're expecting an initial phase of uncertainty that will hold back demand, followed by the direct impact on goods exports as the US and other trading partners are less likely to buy in a weakened global economy. If interest rates remain high by historic standards, these factors may see the cost of capital continue to rise for many firms.
"The inflationary effect of tariffs on the UK is less certain but, on balance, we expect it to weigh on inflation. Falls in energy prices should, if sustained, translate into lower costs for consumers, while UK importers may also benefit from lower prices as Chinese and European exporters look to access alternative markets to the US.
"But the pandemic demonstrated that disruption to the cross-border flow of goods can have a powerful effect on inflation and it's possible that the impact of tariffs may ripple through international supply chains and put upwards pressure on UK goods prices. Overall, we expect inflation to remain sticky as labour costs remain elevated, before falling back towards 2% next year as the effect of higher labour costs begin to fade."
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