The UK's economic growth will be slower than expected this year and next, as the damage from Donald Trump's tariff war hits trade and investment, according to a gloomy forecast from the Organisation for Economic Co-operation and Development (OECD). The international body downgraded its expectations, pushing UK growth from 1.4% to 1.3% in 2025 and from 1.2% to 1% in 2026. Constraints on Whitehall spending and higher-than-expected inflation also played a part, the OECD said.
Echoing the International Monetary Fund's view on Chancellor Rachel Reeves's fiscal rules, the OECD said a 'very thin fiscal buffer' exposed the economy to 'significant downside risk'. Almost all countries suffered downgrades in the latest forecasts, with the OECD responding to uncertainty created by US tariffs. Global growth is now expected to ease to 2.9% this year and next, down from previous forecasts of 3.1% and 3%.
The US, Mexican and Canadian economies are likely to be the worst affected. The OECD cut its US growth forecast for 2025 from 2.2% to 1.6%, and for 2026 from 1.6% to 1.5%. The judgment is likely to disappoint Reeves, who faces a spending review next week. Government spending is constrained by rising costs in health, pensions and defence, while the economy remains stagnant.
Álvaro Pereira, the OECD's chief economist, said he was cautious about the UK's ability to withstand the uncertainty from the global tariff war. 'We hope we have seen the worst of the tariffs and there will be more trade agreements,' he said. His forecasts assume US tariffs on steel, aluminium, cars and a 10% blanket tariff remain in place for at least two years. Inflation is likely to remain 'sticky' in the UK, restricting the pace of interest rate cuts by the Bank of England.
The OECD urged the UK government to restrict day-to-day spending to maintain higher public investment, but noted that limited budget headroom meant only small shocks could blow plans off course. The report found that after a strong first quarter, 'momentum is weakening, with business sentiment rapidly deteriorating' and consumer confidence remaining depressed.
