Britain's economy is expected to grow by 0.8 percent in 2026 as global energy supply disruptions triggered by the Middle East conflict weigh on business investment and consumer spending, according to a report released on Tuesday by the EY ITEM Club.

The report projected that UK economic growth would accelerate modestly to 1.2 percent in 2027, but noted that the outlook had deteriorated sharply since tensions in the Middle East escalated in March. Before the conflict, EY had forecast Britain's economy to grow by 1.3 percent in 2026.

EY said its latest forecast was based on the assumption that the Strait of Hormuz would reopen by the end of the second quarter of 2026, although tanker traffic would remain subdued and supply risks would persist. If the strait remained closed until the end of the year, UK GDP growth could fall further to just 0.3 percent in 2026.

The report warned that rising wholesale energy prices would push inflation above 4 percent by the end of the year, prompting the Bank of England to keep the Bank rate at 3.75 percent throughout 2026, with the next rate cuts not expected until spring 2027.

Under the weaker growth outlook and renewed inflationary pressure, Britain's unemployment rate is expected to rise slightly to 5.8 percent by the end of 2026, while business investment is forecast to remain flat compared with 2025.

The report highlighted that energy-intensive sectors such as steel, chemicals and plastics manufacturing would be particularly vulnerable to prolonged energy market disruption.

Anna Anthony, EY UK & Ireland regional managing partner, said Britain had shown resilience in recent years, but persistently high electricity prices continued to weigh on industrial investment and business confidence.

She said recent government measures aimed at improving industrial competitiveness and diversifying energy supply were positive steps, but noted that it would take time for these measures to address structural challenges facing British manufacturers.