British households are experiencing a sharp slowdown in spending power as the economic shockwaves from the Iran conflict push inflation higher and weaken growth, according to a major new forecast by EY UK.
The consultancy warned that consumer spending growth is expected to almost stall in 2026, rising by just 0.3pc — a sharp downgrade from the 0.9pc increase forecast before tensions in the Middle East escalated.
The report paints an increasingly bleak picture of the UK economy, as higher energy costs, persistent inflation and weaker business confidence combine to squeeze household finances and corporate investment.
EY now expects overall UK economic growth to slow to 0.8pc this year, down sharply from the 1.3pc pace previously anticipated before the outbreak of conflict involving Iran.
Under a more severe scenario in which disruption in the Strait of Hormuz continues throughout the year, growth could slump to just 0.3pc, the firm warned.
The strategically vital shipping route remains central to global energy markets, with fears that prolonged disruption could further drive up oil and gas prices worldwide.
Inflation is now forecast to peak at 4pc by the end of 2026, while the Bank of England is expected to keep interest rates elevated at 3.75pc for longer than previously anticipated.
EY also warned unemployment could rise to 5.8pc as companies scale back recruitment plans amid weakening demand and mounting cost pressures.
Peter Arnold, EY’s UK chief economist, said the British economy was once again being shaped by external geopolitical shocks after what had initially appeared to be a relatively strong start to the year.
“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.
The report suggests consumers are increasingly prioritising savings and essentials over discretionary spending, a trend EY believes is becoming structural rather than temporary.
That shift is expected to hit sectors dependent on consumer confidence particularly hard, including retail, hospitality, leisure and events.
Heavy manufacturing is forecast to suffer some of the deepest long-term damage from the energy shock, with output projected to fall by 2.2pc over the next decade as firms move away from energy-intensive production.
Energy utilities are expected to see output decline by 1.8pc over the same period, while consumer-facing industries are forecast to experience weaker long-term growth.
The warning adds to mounting concern among economists that Britain could be drifting towards a stagflationary environment — characterised by weak growth combined with persistent inflation — as geopolitical instability increasingly feeds into domestic economic pressures.
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