Source: Sharecast
Publishing its latest Economic Forecast, the employers’ organisation expects GDP to grow by 1.1% in 2026 and 0.9% in 2027. In December, it predicted GDP growth of 1.3% for this year and 1.5% for the next.
Inflation, meanwhile, was forecast to once again mount, rising towards 4% by the end of the year. Prior to the outbreak of the US-Iran war, the CBI had expected inflation to continue falling, reaching 2.6% in 2026 and 2.3% in 2027. Currently standing at 2.8%, the Bank of England’s long-term consumer price index target is 2%.
The CBI attributed its more muted outlook to geopolitical tensions in the Middle East and the subsequent spike in energy costs, which it said would weigh on households and businesses throughout 2027.
Since the US first attacked Iran at the end of February, global energy prices have soared, reigniting inflationary fears and dampening interest rate expectations. Although the US, Israel and Iran have signed a tentative ceasefire, the vital Strait of Hormuz remains effectively closed, sporadic attacks continue and a long-term peace deal remains elusive.
At the start of December, the CBI forecast two reductions to Bank Rate, one by the end of 2025 and another in early 2026. The central bank reduced the cost of borrowing to 3.75% in December, but since the outbreak of war has left interest rates on hold and some analysts are pricing in at least one rise this year.
The CBI now expects rates to remain on hold through 2027.
Louise Hellem, the CBI’s chief economist, said: "What’s happening around the world is compounding the UK’s low growth story. We saw weak momentum throughout 2025, but if it weren’t for the latest global shocks, we could be having a much more positive conversation about the economy today.
"Last year it was tariffs and this year it’s the conflict in the Middle East. A world of elevated uncertainty and volatility is no longer the exception, it’s the norm - the backdrop against which businesses must operate."
The CBI expects business investment to contract due to weak demand and higher costs, while the unemployment rate - currently 5.0% - is expected to rise to 5.5% in late 2026 and early 2027.
Hellem concluded: "Policymakers must put business-led growth at the heart of its strategy, as a thriving private sector is what creates sustainable growth, good jobs and long-term prosperity."
The latest forecast is based on traffic through the Strait of Hormuz slowly resuming over the next six months, which leads to energy prices gradually falling back. The CBI acknowledged that its forecasts remain subject to "considerable uncertainty" regarding geopolitical developments.