UK economic growth downgraded in blow to Rachel Reeves

The Confederation of British Industry said rising costs are set to dampen the government’s growth ambitions

New forecasts have downgraded economic growth forecasts due to US tariffs and higher costs in a blow for the chancellor (Owen Humphreys/PA Wire)

New forecasts have downgraded economic growth forecasts due to US tariffs and higher costs in a blow for the chancellor.

The Confederation of British Industry (CBI) said rising costs are set to cause “weak” business investment and dampen on the government’s ambitions to accelerate growth in the UK economy,

The trade body’s latest economic forecast indicated that the UK economy is on track to grow by 1.2 per cent this year. It had previously predicted a rise of 1.6 per cent.

It also downgraded its growth forecast for 2026 from 1.5 per cent to 1 per cent for the year.

It highlighted the UK has seen strong growth over the start of the year, rising by 0.7 per cent in the first three months of 2025.

But it suggested underlying activity “remains sluggish” due to persistently weak demand and gloomy sentiment among businesses.

The CBI said rising costs are set to cause “weak” business investment (Getty Images)

CBI 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.

Shadow chancellor Mel Stride said: “The CBI’s warning is clear – higher employment costs linked to Labour’s Jobs Tax are killing growth.

“This follows the IFS’s warning that any reduction in growth forecasts ‘will almost certainly spark more tax rises’.

“The 'Spend Today, Tax Tomorrow' chancellor, Rachel Reeves, told the CBI that she is ‘not coming back with more borrowing or more taxes’ – but she has boxed herself into a corner and we know she now has a 'secret plan to raise taxes'.

“Make no mistake – more taxes are coming.”

Shadow chancellor Mel Stride claimed Rachel Reeves’s higher employment costs linked to Labour’s Jobs Tax are killing growth (PA Media)

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.

CBI 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 (PA Wire)

“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.”