US tariffs and higher costs for firms mean the UK economy is set to grow at a slower rate than previously predicted, according to new forecasts.
Rising costs are set to cause “weak” business investment and weigh on the Government’s ambitions to accelerate growth in the UK economy, the Confederation of British Industry (CBI) said.
The influential trade body’s latest economic forecast indicated that the UK economy is on track to grow by 1.2% this year. It had previously predicted a rise of 1.6%.
It also downgraded its growth forecast for 2026 from 1.5% to 1% for the year.
The CBI highlighted that the UK has seen strong growth over the start of the year, rising by 0.7% in the first three months of 2025.
But it suggested underlying activity “remains sluggish” due to persistently weak demand and gloomy sentiment among businesses.
It added that higher employment costs linked to the autumn budget, including rises to national insurance contributions and the increased national minimum wage, have impacted firms.
It said this has fed into higher pricing and reduced capital expenditure and hiring among many firms.
Meanwhile, higher US tariffs from President Trump’s administration have also created headwinds for exports to the US and hindered investment from multinational companies in the UK.
It comes after Donald Trump and the Prime Minister finalised a US-UK deal intended to slash trade barriers on goods from both countries while at the G7 summit in Canada earlier this week.
Louise Hellem, chief economist at the CBI, said: “Our latest economic forecast underlines the challenges facing businesses and the wider economy as they’re buffeted by domestic and global headwinds.
“The unpredictable global outlook combined with rising employment costs, gloomy business sentiment, and subdued investment intentions means it’s more important than ever that government pulls all the levers it can to set the UK on a path to sustainable growth.
“With GDP (gross domestic product) set to remain modest in 2026, there is an important opportunity for the government to fire up the growth agenda in the forthcoming Industrial Strategy.
“With the cumulative burden of increased costs being felt by firms across the economy, it is vital the Industrial Strategy helps drive a thriving environment for all businesses.”
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