As the reverberations of the Middle East conflict continue to be felt, the forecast is predicting weak business investment, higher inflation and falling exports.

The forecast also suggests the level of young people not in work will reach almost 18% in 2027, as labour costs led by minimum wage increases and higher input costs leave margins squeezed – a situation that the chief executive of Liverpool Chamber has called “simply unacceptable”.

GDP in 2026 is expected to grow by 0.9% (compared with 1.0% in the previous forecast) then 1.0% in 2027, and 1.3% in 2028.

The Middle East conflict is a major economic drag, with business investment now expected to fall by 2.2% this year, before moving back to –0.1% in 2027.

Inflation is forecast to peak at 3.8% by the end of 2026 before easing to 2.3% by Q4 2027.

Exports are expected to fall by 0.2% this year, largely because of the Iran conflict, before moving back to growth of 1.3% next year.

Unemployment is forecast to be 5.2% in 2026, with youth unemployment expected to hit 17.8% next year.

Paul Cherpeau, chief executive of Liverpool Chamber, said:

“The national picture unfortunately reflects the climate facing many businesses in the Liverpool City Region. Despite showing some resilience, confidence continues to be hit by setbacks at home and abroad, with a mix of UK government policy and geopolitical events undermining the efforts of many businesses.

“This inability to gain any meaningful traction leaves business owners with serious question marks about making longer-term investment and recruitment decisions.

“Perhaps of the greatest concern is the forecast for youth employment, with the report suggesting almost 1 in 5 young people will be out of work by next year. That situation is simply unacceptable, both on a social and economic level, and urgent action is required to ensure we give this generation a chance to pursue successful careers and create the talent pipeline we need to secure the future needs of the city region.

“As the lead private sector convener for the Local Skills Improvement Plan, we support employers and education providers to work together to ensure young people have the right skills to succeed. This work is vital, but it must be underpinned by effective government policy to incentivise growth and remove barriers to employment.”

UK GDP is expected to grow by 0.9% in 2026, only marginally slower than the BCC’s previous forecast, despite the ongoing geopolitical uncertainty. This is largely reflective of stronger than expected GDP in Q1. The economy is expected to remain at a similar level in 2027, with GDP growth of 1%. It is forecast to pick up to 1.3% in 2028.

Services continue to be the strongest sector in the economy, with predicted growth of 1.3% this year. Meanwhile, construction is expected to contract by 1.0% in 2026 and the manufacturing sector will see a year of two-halves, with strong Q1-Q2 driven by restocking, but reversing as input costs bite, leading to 0.8% growth overall.

With firms facing elevated domestic costs and global economic uncertainty, business investment is forecast to contract by 2.2% in 2026 and 0.1% in 2027, before recovering to grow by 2.3% in 2028.

After easing in April, CPI inflation is forecast to rise again in the coming months, peaking at 3.8% in Q4 (compared with 2.7% in the previous forecast). Higher energy prices and shipping costs, linked to the ongoing unrest in the Middle East, are the main drivers. Although much will depend on the course of the conflict, inflation is currently forecast to ease to 2.3% by the end of 2027, and 2.0% by the end of 2028.

There is uncertainty over how the Bank of England will react, but given already tight monetary policy, weakening growth, rising unemployment, and potentially lower second-round inflationary effects on labour costs, the forecast expects the Bank to hold through the current inflationary spike. However, this could change if the inflation shock deepens.

With vacancies continuing to fall unemployment is forecast to rise to 5.2% in 2026 and then reach 5.5% in 2027. BCC surveys continue to show labour costs as main cost pressure for businesses.

Youth unemployment remains an area of concern as labour costs and AI erode entry level jobs. It is expected to be 16.9% in 2026, rising to 17.8% in 2027. With firms facing squeezed margins because of input costs and minimum wage increases, growth in average earnings is forecast to ease from 3.7% by Q4 2026 to 3.3% by Q4 2027.

With the Middle East conflict making international trade challenging, UK exports are forecast to fall this year by 0.2% (compared with 0.7% growth in the last forecast) before recovering to 1.3% growth in 2027. Much will depend though on the course of the war and the impact of the closures to the Strait of Hormuz on global supply chains.

The forecast for imports in 2026 has been upgraded to 1.4% (0.6% in Q1), falling to 1.1% in 2027. Consequently, net-trade is expected to remain broadly stable at -2.8% this year and next.

David Bharier, deputy director economics and insights at the British Chambers of Commerce:

“While the UK economy has shown some welcome resilience this year, the expected headline growth figure of 0.9 per cent for 2026 masks underlying concerns.

“Half of Q1’s GDP gain came from firms building inventories against further supply disruptions – a sign of contingency planning not expansion. Business investment is expected to fall 2.2 per cent this year, reflecting what BCC surveys consistently show: most SMEs are not increasing investment.

“Much hinges on the course of the Middle East conflict. Inflation is likely to edge towards four per cent this year, but the Bank of England faces a different scenario compared with the 2022 crisis. Weaker growth, rising unemployment, and already restrictive monetary policy mean the Bank could seek to manage this without raising the interest rate and risking further damage.

“The UK is not in recession, but the economy remains trapped in a cycle where each recovery is interrupted before gaining traction, and firms go back on the defensive. With youth unemployment approaching 18 per cent by mid-2027, the UK risks weakening the skills pipeline it needs for the next economy.

“The long-term economic potential remains enormous. The UK has world-leading research institutions, rapid AI adoption and the third largest AI investment ecosystem globally. But realising that potential requires reducing the cost burden on firms, rewarding productive risk-taking, and positioning UK businesses to capture the opportunities that will drive future economic gain.”