Iran war to drag down UK GDP growth 0.5 points in 2026

The US-Israeli war on Iran will knock 0.5 percentage points off the UK’s GDP growth in 2026, EY has forecast.

Prior to the conflict, the UK economy was on track to grow by 1.3% in 2026. But disruption of global oil supply and its subsequent effect on costs through the supply chain will now slow GDP growth to 0.8% this year, the consultancy predicted. 

And while the economy is set to improve the following year, the UK’s GDP growth is still predicted to be slowed 0.2 points to 1.2% in 2027.

Retail and hospitality businesses will suffer most in the squeeze, as consumer spending growth slows to just 0.3% in 2026 – down by two-thirds on pre-war estimates of 0.9%. 

“Despite a relatively strong start to 2026, the conflict in the Middle East means the UK economy is once again being shaped by external shocks and on track for another year of subdued growth,” said EY UK’s chief economist, Peter Arnold.

Arnold added that the cautious levels of consumer spending seen since the pandemic now appeared to be structural rather than temporary. All income groups had reallocated household spending towards savings and essentials, and away from discretionary spend.

“This is a concerning trend for consumer-facing sectors and will likely be exacerbated by ongoing global uncertainty and the predicted rise in inflation,” he said.

Discretionary spend has fallen 5% since 2019. Without this decline, UK households would be spending an additional £78bn each year with retail, hospitality and leisure businesses.

Learned in the pandemic, consumers’ cautious spending patterns have been reinforced in subsequent global economic challenges, according to EY UK&I retail lead Silvia Rindone. 

“These global pressures sit outside retailers’ control, but their impact on footfall, margins and investment capacity is very real. 

“In this environment, retailers that adapt quickly are best placed to navigate uncertainty. Prioritising consumer-focused, value‑driven propositions, strengthening trust and delivering personalised experiences will be critical to maintaining relevance.”