British households are set to slash spending as a renewed inflation surge, driven by the Iran conflict, squeezes family finances and drags the economy towards stagnation, according to a bleak new forecast from EY UK.
The consultancy warned that consumer spending growth is now expected to collapse to just 0.3pc in 2026 — barely a third of the 0.9pc previously forecast before the war in the Middle East erupted.
The sharp deterioration reflects mounting fears about soaring energy prices, stubborn inflation and weakening confidence as the global economy absorbs another geopolitical shock.
Discretionary spending — including retail, hospitality and leisure — is expected to bear the brunt as households divert more income towards essentials and savings.
EY also slashed its broader growth outlook for Britain, predicting GDP will expand by only 0.8pc this year, down from the 1.3pc previously expected before the conflict intensified.
Although growth is forecast to recover modestly to 1.2pc in 2027, the economy would still be weaker than previously expected.
The warning adds to a growing chorus of concern about the economic fallout from instability in the Gulf, particularly around the strategically vital Strait of Hormuz, through which roughly a fifth of global oil supplies pass.
EY warned that if the conflict escalates further and the shipping route remains blocked for the rest of the year, UK growth could fall to just 0.3pc in 2026.
Inflation is forecast to climb to 4pc by the end of next year under EY’s central scenario, keeping pressure on the Bank of England to delay interest rate cuts.
Interest rates are expected to remain stuck at 3.75pc throughout the year, while unemployment is projected to rise to 5.8pc as firms curb hiring amid weaker demand.
The gloomy assessment comes ahead of official GDP figures expected to show the economy contracted by 0.2pc in March after expanding by 0.5pc in February.
Despite the expected monthly decline, economists still believe the economy grew by around 0.6pc overall during the first quarter, buoyed by stronger activity earlier in the year.
Peter Arnold, chief economist at EY UK, said Britain was once again being buffeted by forces beyond its control.
“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,” he said.
“We expect the first quarter of this year to show GDP on a fairly promising trajectory, before flatlining in the second quarter and gradually recovering into 2027 as the global markets adjust.”
He warned that higher energy costs would feed directly into inflation and borrowing costs.
“Energy supply constraints will push inflation higher and delay interest rate cuts, increasing the cost of borrowing for businesses and prompting some companies to reassess spending decisions,” he said.
Mr Arnold also suggested that weak consumer spending habits may now be becoming entrenched.
“Cautious levels of consumer spending seen since the pandemic also now appear more structural than temporary, with all income groups reallocating household spending towards savings and essentials and away from discretionary spending,” he said.
“This is a concerning trend for consumer-facing sectors and will likely be exacerbated by ongoing global uncertainty and the predicted rise in inflation.”
Heavy industry is expected to suffer particularly badly from the latest energy shock.
EY estimates that over the next decade, UK heavy manufacturing output could be reduced by 2.2pc, while energy utilities may shrink by 1.8pc as the economy shifts away from energy-intensive production.
Consumer services — including retail, hospitality and live events — are also forecast to suffer a long-term hit.
“Industrial and consumer-facing businesses are particularly exposed to the effects of energy volatility,” Mr Arnold said.
“High electricity prices were already constraining UK economic output last year, and further energy market disruption will intensify this pressure.”
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