Households to slam brakes on spending as Iran war sends cost surging, warns EY

Consumer spending is set to pull back sharply as an inflation spike caused by the Iran war takes its toll on household finances and the wider economy, according to a report.

EY’s economic outlook shows UK consumer spending growth will grind almost to a halt, at a predicted 0.3% for 2026, down from the 0.9% predicted before the conflict.

Discretionary spending will bare the brunt of the hit, with consumer-facing companies set to be impacted, while the energy price shock will wreak havoc on manufacturing and industrial firms, EY said.

It has joined other forecasters in predicting sharply slower growth this year following the outbreak of war in the Middle East, predicting output will grow by 0.8%, down from the 1.3% the UK was on track to notch up before the war.

Growth will bounce back to 1.2% in 2027, but this is below the 1.4% pre-conflict forecast, according to EY.

It also warned that growth could plunge to just 0.3% this year if the Iran war escalates and the crucial Strait of Hormuz shipping route remains closed for the rest of the year.

Inflation will peak at 4% by the end of 2026 under its central forecast, which it believes will see interest rates held at 3.75% for the rest of the year, while unemployment will hit 5.8% as weaker growth impacts hiring.

The gloomy report comes ahead of official gross domestic product (GDP) figures on Thursday, which most economists expect will show the economy slamming into reverse in March, with a 0.2% contraction following 0.5% growth in February.

However, the outturn for the quarter as a whole is set to have been boosted by the performance in the first two months of the year, with economists pencilling in 0.6% growth between January and March.

Published: 12/05/2026 by Radio NewsHub