UK consumer spending growth is expected to slow sharply this year as conflict in the Middle East weighs on economic momentum and adds further pressure to retail and hospitality businesses.
The latest EY UK Economic Outlook forecasts consumer spending will rise by just 0.3 per cent in 2026, down from the 0.9 per cent growth the UK was on track to achieve before the conflict.
EY also cut its GDP growth forecast for the year from 1.3 per cent to 0.8 per cent, warning that disruption to global energy supply, higher prices and renewed inflationary pressure will hold back the economy.
EY analysis highlights a structural shift in household spending since the pandemic, with consumers allocating more income to essentials and savings while cutting back on discretionary categories.
The average UK household now spends 42 per cent of its disposable income on discretionary items, down from 47 per cent in 2019.
EY said that if this proportion had remained unchanged, households would be spending an additional combined £78bn across categories such as clothing and footwear, restaurants and hotels, and recreation and culture.
The report found that household savings rates have risen from seven per cent in 2019 to nine per cent today, while the share of income spent on essentials such as household energy, mortgages and rents has climbed from 46 per cent to 49 per cent.
Higher-income households, which account for a disproportionate share of consumer spending, have also pulled back. The top two income quintiles account for 56 per cent of total UK consumer spending, but the highest income group has lifted its savings rate from 10 per cent to 13 per cent since 2019, while cutting discretionary spending from 50 per cent to 44 per cent.
EY UK chief economist Peter Arnold said: “Despite a relatively strong start to 2026, the conflict in the Middle East means the UK economy is once again being shaped by external shocks and on track for another year of subdued growth.
“We expect the first quarter of this year to show GDP on a fairly promising trajectory, before flatlining in the second quarter and gradually recovering into 2027 as the global markets adjust.
“Cautious levels of consumer spending seen since the pandemic also now appear more structural than temporary, with all income groups reallocating household spending towards savings and essentials and away from discretionary spending.
“This is a concerning trend for consumer-facing sectors and will likely be exacerbated by ongoing global uncertainty and the predicted rise in inflation.”
The Outlook’s modelling assumes that the Strait of Hormuz reopens by the end of the second quarter of 2026, although with subdued tanker traffic and continued disruption risk.
If the conflict escalates and the strait remains closed until the end of the year, EY said UK GDP growth could fall to 0.3 per cent in 2026.
Wholesale energy price increases are expected to push UK inflation above 4 per cent by the end of the year. EY now expects the Bank of England to hold the Bank Rate at 3.75 per cent throughout 2026, rather than making the two cuts previously priced in by the market.
Unemployment is forecast to rise slightly to 5.8 per cent by the end of the year as weaker growth affects hiring, before falling to 5.5 per cent within a year and 5.2 per cent in 2028.
EY UK&I retail lead Silvia Rindone said retailers were facing another external shock that could further dampen demand and restrict investment.
“UK consumers are contending with another global economic challenge that will squeeze household budgets and reinforce cautious spending patterns that have persisted since pandemic,” she said.
“These global pressures sit outside retailers’ control, but their impact on footfall, margins and investment capacity is very real.
“Disruption to shipping routes and energy supply is already pushing up costs across international networks, and further cost-of-living increases are limiting both demand and retailers’ ability to invest in growth and innovation.”
Rindone said retailers that adapt quickly will be best placed to manage the uncertainty, with value-led propositions, trust and personalisation becoming increasingly important.
EY’s analysis found that nominal spending on electricity, fuel and other utilities has risen 41 per cent since 2019, while mortgage interest payments have climbed 28 per cent and rental and housing spending has increased 20 per cent.
By contrast, several consumer-facing categories have seen sharp real-terms declines. Clothing and footwear spending has fallen 17 per cent in nominal terms and 30 per cent in real terms, while restaurants and hotels have dropped 11 per cent in nominal terms and 30 per cent in real terms.
Recreation and culture has recorded 3 per cent nominal growth, but real spending has fallen 13 per cent, suggesting consumers are paying more while buying less frequently.
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