UBS has trimmed its forecast for UK economic expansion in 2026 to 0.6% from an earlier 1.1%, attributing the downgrade to elevated energy prices that have flowed from the Iran conflict and are pressuring inflation, consumer spending and corporate margins, according to a bank note issued on Monday.
The revision arrives as a two-week ceasefire in Iran holds. Since the outset of the conflict, UBS noted that global oil prices have risen by roughly 40% and wholesale gas prices are around 50% higher. Those energy price moves are central to the banks reassessment of the growth outlook.
UBS economist Dean Turner said the firm believes "we may have passed the point of maximum risk" for global energy markets, though he emphasised that negotiations remain unpredictable and uncertainty persists.
On inflation, UBS projects headline consumer price inflation in the UK will fall to about 2.5% year-on-year in April, helped by regulated price changes and budget measures, before rising again toward close to 4% by the end of the year. The brokerage expects core inflation to end 2026 below the 3.2% year-on-year rate reported in February.
"Thats not great news, but nowhere near the levels we endured in 2022," Turner said in the note, framing the projected inflation profile as a meaningful but contained setback.
The bank outlined the transmission channels through which higher energy costs will affect the economy. Increased prices for petrol, diesel and household heating will reduce disposable income for consumers. Energy-intensive manufacturers are expected to face the steepest increases in operating costs, while service-sector businesses will also contend with rising overheads. UBS warned that firms able to pass higher costs on to consumers will contribute to inflationary pressure, whereas firms that cannot will see margins squeezed, curbing investment, hiring and wage growth.
Despite these pressures, UBS argued the wider economic hit should be limited. The bank emphasised that energy costs, excluding fuel, represent a relatively small share of overall economic activity and make only a modest direct contribution to final consumer prices.
On monetary policy, UBS signalled disagreement with market pricing that anticipates Bank of England rate hikes in 2026. Turner commented that "on hold for longer seems much more likely," and highlighted that short- to medium-duration, high-quality bonds "continue to offer attractive yields at current levels - certainly better than those available on cash."
As for investment strategy, UBS recommended a de-risked but still invested portfolio stance, lowering exposure to cyclical assets. The bank cautioned that market rebounds after positive developments, such as the ceasefire announcement, "can be swift," making complete withdrawal from markets inadvisable. Finally, UBS said that even with the downward growth revision, a recession remained unlikely.
Summary
UBS has revised down its 2026 UK growth forecast to 0.6% from 1.1% amid higher oil and gas prices tied to the Iran conflict. Inflation is expected to dip in April before rising again toward year-end, and the bank favours a cautious, de-risked investment approach while remaining invested.