UK gets biggest cut to growth outlook this year among world’s major economies
The UK is facing the biggest hit to economic growth out of the world’s most advanced economies because of a spike in energy prices caused by war in the Middle East, new forecasts show.
The Organisation of Economic Cooperation and Development (OECD) published the biggest downgrade to the UK’s growth outlook for 2026 than any other country in the G20 group of economies. In its interim economic outlook, the influential organisation predicted that gross domestic product (GDP) will be 0.5 percentage points lower in 2026 than prior forecasts, at 0.7%, before rising to 1.3% in 2027, which has not changed. This puts the UK at second lowest in the G7 in terms of economic growth this year, behind only Italy. But it reflects the steepest cut to growth expectations out of the G20 economies that the OECD analysed in its latest report. On the other hand, it upgraded growth forecasts for the US by 0.3 percentage points in 2026 – with growth being buoyed by stronger consumer spending, especially among higher income households. The OECD explained the UK ended 2025 on a “weak note” compared to other countries such as the US, so there are less positive growth factors to offset the pull from soaring energy prices. Across the G20 – which incorporates countries including China, India and Saudi Arabia – economic growth is projected to weaken in the near term before gradually rising through 2027. Furthermore, the US-Israel’s war with Iran has also changed the trajectory for inflation around the world thanks to soaring oil and gas prices. For the UK, Consumer Prices Index (CPI) inflation is set to be 1.5 percentage points higher this year than it had been forecasting a few months ago. The new projections show inflation averaging at 4% in 2026, up from the 2.5% forecast in its last report in December, and then declining to 2.6% in 2027, which is up from the previous projection of 2.1%. This means the UK is headed towards the second highest inflation rate this year in the G7 group of advanced economies, behind only the US. Chancellor Rachel Reeves responded to the report to say the war in the Middle East “is not one that we started, nor is it a war that we have joined”, adding: “But it is a war that will have an impact on our country.” Lindsay James, investment strategist at Quilter, said the UK economy’s growth projections had been “hammered” in the latest report. She added: “While the UK should still see some growth this year, albeit minimal, it will depend heavily on how the conflict in Iran plays out. “It remains the case that the situation could worsen further still, which would have a significant knock-on effect on economies,” she said. “While it is hoped that a resolution will be achieved sooner rather than later, there’s a risk that the OECD’s outlook becomes a best case scenario.” The OECD said there were a lot of uncertainties about the conflict in the Middle East but that longer lasting closures to energy infrastructure and shipping could have much bigger consequences to global economies than was currently expected. A sustained spike in global energy prices will add significantly to business costs and raise inflation, which would weigh on growth, according to the report. “A prolonged period of disruption could also result in the emergence of significant energy shortages that would lower growth further,” the OECD said. It referred to some Asian governments which have already taken steps to mitigate the risk of shortages, such as energy rationing for businesses in India and energy export restrictions in China. The report also warned over a sharp increase in fertiliser prices since the conflict escalated at the end of February, with regions in the Middle East big producers of things like urea and ammonia. Supply shortages “could increase global food prices, with potentially serious impacts to household finances and inflation expectations”, the OECD warned. The organisation’s economists said the world’s central banks need to stay “vigilant” to keep inflation under control in response to the increased risks to global prices. It added that governments should encourage more efficient energy use in homes and across industries while making sure that support to offset higher energy prices is targeted at households most in need. In the longer term, it argued that governments need to do more to reduce dependence on fossil fuel imports which would make them less vulnerable to geopolitical shocks. Ms Reeves added: “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. “Our economic plan means going further to build a stronger, more secure economy. “That means going further on our three big choices: empowering regional growth, embracing AI and innovation, and establishing a closer relationship with the EU.” Sir Mel Stride, shadow chancellor for the Conservatives, said the downgrade to the UK’s growth forecast was “a damning verdict on how vulnerable our economy is, thanks to Labour”. He added: “Rachel Reeves has ramped up borrowing, spending and taxes. “As a result, we have stagnant growth, while inflation, unemployment, the deficit and debt interest costs have all shot up.”
Published: by Radio NewsHub