The latest British Chambers of Commerce (BCC) Economic Forecast suggests the outlook for the UK will remain uncertain. While the economy was more resilient in Q2 than expected, higher energy and business costs are likely to keep growth weak this year and next.
The key points in the forecast are:
- GDP in 2026 is expected to grow by 1.0% (compared with 0.9% in the previous forecast) then 1.0% in 2027, rising to 1.3% in 2028.
- Faced with a raft of domestic cost pressures and global headwinds, business investment is now expected to fall by 0.2% this year, followed by a rise of 0.4% in 2027, and 1.2% in 2028.
- Inflation is forecast to peak at 3.6% by the end of this year (3.8% in the previous forecast) before easing to 2.3% by Q4 2027.
- Unemployment is forecast to be 5% by the end of 2026 and then peak at 5.4% in 2027. Youth unemployment is expected to reach a high of 17.6% next year.
- The Middle East conflict and US tariffs mean exports are likely to only grow by 0.4% in 2026, improving to 1.3% in 2027.
UK economic outlook
GDP is anticipated to grow by 1% in 2026, which is only marginally better than the BCC’s previous forecast (0.9% in the Q2 forecast). Despite severe global challenges, in particular higher oil prices, the UK economy was more resilient than expected in the first six months of this year. Within uncertainty about the course of conflict in the Middle East, GDP is expected to remain at 1% in 2027. Growth is forecast to pick up to 1.3% in 2028.
GDP is boosted by private consumption for the forecast period, with investment making up a diminishing contribution, and net trade contributing negatively due to the export deficit.
The economy continues to be weighted towards services industries, with growth in that sector 1.5% this year. In contrast, construction is expected to contract by 1.3% in 2026. Meanwhile, the forecast suggests manufacturing will perform better than expected this year overall, with grow of 1% (0.8% in the previous forecast).
Business investment will continue to struggle
With firms facing high domestic cost pressures, the BCC is forecasting business investment to contract by 0.2% in 2026, before recovering to growth of 0.4% in 2027. The figure for this year is an upgrade on the previous estimate (-2.2% in the Q2 forecast), reflecting stronger ONS data in Q2. However, BCC surveys show SME sentiment has fallen to its lowest level since the pandemic, suggesting the forecast improvement is down to the volume of investment by larger firms.
Inflation pressures to remain stubborn
CPI inflation is expected to stay above target until the end of the forecast period. After easing in spring and early summer this year, inflation is expected to peak at 3.6% in Q4 this year (compared with 3.8% in the previous forecast). Higher household energy costs because of the conflict in the Middle East continue to be the main drivers. There is also a risk from higher food prices in the wake of this summer’s drought in parts of the UK.
The forecast suggests the interest base rate will stay at 3.75% over the next two years, as the Bank of England looks to see inflation easing gradually without causing a wage price spiral. However, the combined possible impact of food inflation, high energy prices and the Middle East conflict, could lead to an interest rate rise.
Unemployment to rise next year
While the labour market has proved more resilient than expected in recent months, unemployment is still expected to end 2026 at 5.0% (a downgrade from 5.2% in the previous forecast) and then reach 5.4% in 2027.
Youth unemployment remains a real cause for concern for the UK economy. It is expected to be 16.6% by the end of the year (down from 16.9%), before peaking at 17.6% in 2027. Growth in average earnings is forecast to hold steady at 3.75% in 2026 and 2027, as firms face squeezed margins.
Exports to struggle amid global uncertainty
UK exports are expected to grow by just 0.4% this year. While that is an upgrade on the previous BCC forecast (0.2%), reflecting some easing of Middle East tensions, the absence of a lasting peace deal means trade will remain challenging. The forecast suggests exports will grow by 1.3% in 2027, and 2.4% in 2028.
Imports are anticipated to grow by 1.9% this year (compared with 1.4% in the last forecast), easing to 1.7% in 2027. Consequently, net-trade is expected to sit at -2.9% of GDP this year, and –3% in 2027.
David Bharier, Deputy Director Economics and Insights at the British Chambers of Commerce:
“Our latest forecast paints an uncertain outlook for the UK economy. Businesses have absorbed another major geopolitical shock and shown real resilience.
“But growth remains subdued, and rests on consumption, not investment. Net trade is also a drag in every single year of the forecast.
“Our sentiment data bears this out. Just 17% of firms now say they are increasing investment, the lowest since the pandemic, citing labour costs and taxation as the main factors. A declining proportion of SME exporters are seeing increased overseas sales.
“This is the result of a decade of rising costs. Our modelling shows domestic, policy-driven business cost base has risen by more than 70 per cent since 2016 for a typical SME, even before Brexit trade friction and global shocks are factored in.
“AI and exports could hand the UK a major double gain, but the general cost burden holding back SMEs also needs to be addressed.
“The central task of the next Budget is to enable firms to invest, innovate, and trade. every measure needs to pass a growth delivery test. Does it visibly increase investment, exports, hiring or expansion? Until it does, don’t expect this pattern to break.”
Commenting on the forecast, Vicky Pryce, chair of the BCC Economic Advisory Council said:
“The strong start to 2026 will soon be well into rear view mirror as the UK economy continues in the slow lane.
“A mix of stubborn inflation, struggling exports and elevated unemployment are creating an ever-challenging environment for businesses, particularly SMEs.
“The BCC’s forecast echoes similar assessments by the Bank of England and IMF who have recognised some resilience amid global headwinds. However, resilience alone will not turbocharge growth and give businesses the tools they need to power the economy.”
Read all infosheet of the Q3 forecast here