The Organisation for Economic Co-operation and Development (OECD) has warned that the UK economy is being held back by renewed energy inflation sparked by the Middle East conflict and persistent regional disparities, urging the government to accelerate its pro-growth agenda.
In a new report on the UK economy, the OECD maintained its forecasts, predicting that UK gross domestic product (GDP) will slow to 0.9% in 2026, down from 1.4% last year. The body said that renewed energy inflation caused by the US-Israel war with Iran has weakened prospects for growth this year by weighing on households and firms.
Exposure to Volatile Fossil Fuel Prices
The conflict has also highlighted the UK economy's exposure to volatile fossil fuel prices, underlining the need to decarbonise power generation and accelerate electrification, according to the OECD.
Furthermore, the report found that regional disparities in the country were holding back living standards and the performance of the economy, particularly in the context of higher unemployment and stretched job opportunities for young people.
Government's Pro-Growth Ambitions
The OECD said the government's pro-growth ambitions "appropriately target long-standing weaknesses in productivity and persistent regional disparities." However, the report added: "Renewed geopolitical tensions and higher energy prices have compounded challenges for economic activity, inflation and public finances."
The organisation said it was important to keep up the momentum with policy reforms for the pro-growth agenda to be successful.
It comes as Andy Burnham, who is set to replace Sir Keir Starmer as prime minister next week, plans to introduce a "No 10 North" based in Manchester. The former Greater Manchester mayor said he wants to transform Britain by transferring power out of Whitehall and giving regions the ability to control essential utilities, transport and housing.
Chancellor's Response
Chancellor Rachel Reeves said: "The OECD agrees that we have restored stability, putting the economy in a much stronger position than it was two years ago. We are forecast to be the fastest-growing G7 economy in Europe this year and next and, for the first time since 2004, we are forecast to borrow less this year than the G7 average. In my Mansion House speech I set out where the opportunities for growth lie: backing Britain as a global leader in AI, building a strong relationship with the EU, and unlocking investment and opportunity in every region of this country. We have the right economic plan to build a stronger more secure Britain."
