UK growth could be 'postponed' for two years, report warns

UK economic growth could be "postponed" for two years amid a toxic cocktail of headwinds for confidence, according to a respected forecast which says further interest rate cuts may help lift the mood.

EY ITEM Club, which uses the Treasury's economic modelling, downgraded expectations for output in both 2025 and 2026 in its latest report. It warns of a direct hit from Donald Trump's trade war and from persistent high inflation in the UK economy.

But the forecast says the biggest impact would come from weaker sentiment among both households and businesses, given the surge in uncertainty and hits to global growth caused by the imposition of tariffs. Money latest: Vet hits back at critics of prices A "baseline" 10% tariff on imports from most countries around the world is in place while UK-produced steel, aluminium and cars are subject to duties of 25%.

Around 16% of all goods shipped abroad head for the United States typically but the study said that weaker demand for exports would likely hit that number. It forecast UK growth of 0.8% this year - down from the 1% it expected three months ago - and a figure of 0.9% for 2026.

That last figure represented a downgrade of 0.6 percentage points. These are not the numbers the Treasury will want to see, coming in even lower than the International Monetary Fund's downgrades last week, as it leads work on the government's stated priority of securing economic growth.

It has been accused of an own goal through the chancellor's tax increases on business, which came into effect at the beginning of this month. At the same time, households are grappling a surge in bills, including those for energy, water and council tax, which are threatening to depress spending power further.

Data on Friday showed a renewed slump in consumer confidence and sharp increases in the number of firms in "critical" financial distress and going to the wall. EY said the weaker global economic backdrop and spiralling levels of uncertainty would weigh on both families and businesses.

It warned the consumer mood remained "cautious" amid the continuing pressures on household budgets, further limiting demand for major purchases. Read more from Sky News:US trade deal 'possible' but not 'certain' - ministerBank chiefs to Reeves: Ditch ring-fencing to boost UK economy Anna Anthony, regional managing partner for EY UK & Ireland, said: "There had been signs that the economy was exceeding expectations in the opening months of 2025, but a combination of global trade disruption, uncertainty, and persistent inflation look likely to postpone the UK's return to more moderate levels of growth.

"Businesses thrive on certainty, so it's unsurprising that an unpredictable global market is translating into lower levels of business investment over the short term. "While conditions remain challenging, there are still some grounds for optimism.

"The services-led UK economy is projected to see continued growth this year and gradual interest rate cuts should slowly bolster business and household spending. "Over time, the unpredictable global landscape may offer opportunities for the UK to position itself as a stable, attractive destination for investment.".