OECD Downgrades UK Growth Forecast Amid Middle East Conflict Fallout
The Organisation for Economic Cooperation and Development (OECD) has issued a stark warning, stating that the ongoing conflict in the Middle East will inflict more damage on the UK's economy than on any other industrialised nation. In its latest analysis, the Paris-based thinktank highlighted rising inflation and a significant slowdown in economic momentum as key concerns.
Sharp Reduction in Growth Projections
According to the OECD, the UK economy is now expected to grow by just 0.7% this year, a sharp downgrade from the previous forecast of 1.2% for 2026. This 0.5 percentage point cut is attributed to a combination of factors, including a weakening jobs market and a contraction in business investment towards the end of 2025. The organisation pointed to the lack of momentum heading into 2026 and the shock from escalating oil and gas prices resulting from the US-Israel attacks on Iran.
The UK's vulnerability stems from its heavy reliance on international trade and fuel imports, making it particularly susceptible to energy price spikes. In contrast, other major European economies like France, Germany, and Italy are projected to experience a more modest reduction in growth of only 0.2 percentage points, as they are better insulated from spiralling energy costs.
Global Economic Resilience Tested
The OECD emphasised that the evolving Middle East conflict poses a severe test to the resilience of the global economy. While average global growth remains on track at 2.9%, as predicted in December, the aftershocks are expected to trim the forecast for 2027 from 3.1% to 3%. The thinktank cautioned that a prolonged period of higher energy prices could significantly increase business costs and drive up consumer price inflation, with adverse consequences for economic growth worldwide.
Despite these challenges, the OECD noted that the global economy had shown resilience prior to the conflict, buoyed by strong investment in artificial intelligence (AI) and supportive financial conditions. However, the uncertainty surrounding the war's outcome introduces significant downside risks, including potential disruptions to Middle East exports that could further elevate energy prices and exacerbate commodity shortages.
Divergent Impacts on Major Economies
In a surprising turn, the OECD revised its forecast for the United States upward, predicting growth of 2% in 2026, up from 1.7% in December. This improvement is linked to a US Supreme Court ruling that reduced import tariffs and increased demand for US oil amid the Iran conflict. However, the report warned that a decline in AI investments next year could slow US momentum, with growth expected to dip to 1.7% in 2027.
Meanwhile, countries like Turkey, Brazil, and Mexico are also anticipated to be among the worst hit by rising fuel prices, which will strain household incomes and business profits. The OECD's projections are conditional on the assumption that energy market disruptions will moderate over time, with prices declining gradually from mid-2026 onwards.
UK Government Response and Future Outlook
In response to the economic threats posed by the Middle East conflict, UK Chancellor Rachel Reeves announced plans to bolster the economy through measures such as empowering regional mayors, embracing AI and innovation, and fostering a closer relationship with the European Union. Reeves stated that the war, while not initiated by the UK, will inevitably impact the country, necessitating further efforts to build a stronger and more secure economic foundation.
Reflecting on recent performance, the OECD reported that the UK's economic growth last year was 1.3%, compared to 0.9% in France and 0.4% in Germany. As the situation evolves, the OECD highlighted potential upside scenarios, including an earlier resolution to the conflict or broader AI investments that could yield stronger productivity gains, possibly pushing growth higher than currently anticipated.
