OECD Issues Stark Warning on UK Economic Outlook Amid Iran Conflict
The Organisation for Economic Co-operation and Development (OECD) has delivered a sobering assessment, indicating that the United Kingdom is poised to experience substantially weaker economic growth alongside surging inflation this year. This grim forecast is directly attributed to the prolonged war in Iran, which threatens to trigger global energy shortages and drive food prices higher.
Revised Forecasts Paint a Bleak Picture
In its latest interim economic outlook, the influential international body has significantly downgraded its projections for the UK. The OECD now anticipates that UK Consumer Prices Index (CPI) inflation will average 4% throughout 2026. This marks a sharp increase from the 2.5% forecast published in its December report. For 2027, inflation is expected to decline to 2.6%, which remains higher than the previous projection of 2.1%.
Concurrently, the outlook for gross domestic product (GDP) growth has been revised downward. The OECD predicts UK GDP growth will be 0.5 percentage points lower in 2026 than prior estimates, settling at a meagre 0.7%. Growth is then expected to rise to 1.3% in 2027, a figure unchanged from earlier forecasts.
UK's Position Among Global Peers Worsens
These revised figures position the UK economy in an unfavourable light compared to its international counterparts. The nation is now on track to have the second-highest inflation rate within the G7 group of advanced economies for 2026, trailing only behind the United States. In terms of economic growth, the UK is projected to be second-lowest in the G7 this year, ahead of only Italy.
The conflict's impact extends beyond the UK, with the OECD noting a worsened outlook for many of the world's largest economies. Across the broader G20, which includes major players like China, India, and Saudi Arabia, economic growth is projected to weaken in the near term before a gradual recovery through 2027.
Energy and Food Supply Chains at Risk
The report highlights multiple channels through which the Iran war is destabilising the global economy. Disruptions to oil and gas supplies are a primary concern, with the OECD warning that longer-lasting closures to critical energy infrastructure and shipping lanes could have far more severe consequences than currently anticipated.
"A sustained spike in global energy prices will add significantly to business costs and raise inflation, which would weigh on growth," the report stated. It further cautioned that "a prolonged period of disruption could also result in the emergence of significant energy shortages that would lower growth further."
Furthermore, the conflict has already caused a sharp increase in fertiliser prices since its escalation in late February, given the Middle East's role as a major producer of key components like urea and ammonia. The OECD warned that resulting supply shortages "could increase global food prices, with potentially serious impacts to household finances and inflation expectations."
Policy Responses and Government Reactions
In response to these heightened risks, the OECD's economists urged the world's central banks to remain "vigilant" in their efforts to control inflation. The organisation also called on governments to take immediate and targeted action.
Recommended measures include encouraging more efficient energy use in both residential and industrial sectors and ensuring that financial support to offset higher energy costs is precisely directed towards the households most in need. For the longer term, the OECD argued that governments must accelerate efforts to reduce dependence on fossil fuel imports, thereby building greater resilience against future geopolitical shocks.
Chancellor Rachel Reeves addressed the report's findings, stating, "The war in the Middle East is not one that we started, nor is it a war that we have joined. But it is a war that will have an impact on our country." She defended the government's economic strategy, adding, "In an uncertain world we have the right economic plan. The decisions we have taken have put us in a better position to protect the country’s finances and family finances from global instability."
Reeves outlined the government's focus on empowering regional growth, embracing artificial intelligence and innovation, and establishing a closer relationship with the European Union as part of its plan to build a stronger, more secure economy.
