UK growth forecast slashed to 0.7% as OECD warns Iran war will be worst among G20

The UK is expected to suffer the worst economic impact among the world’s major economies from the ongoing Middle East conflict, according to the OECD, which has sharply cut its growth forecasts and warned of rising risks of inflation.

In its latest outlook, the OECD cut the UK’s growth forecast for 2026 to just 0.7 per cent, down from a previous estimate of 1.2 per cent, placing it among the weakest performers in the G20. Only Italy is expected to record the slowest growth among the G7 economies, while the UK is also expected to have one of the highest inflation rates in the group.

The downgrade reflects the UK’s vulnerability to rising energy costs, which have increased following the escalation of the US-Israel conflict with Iran. Disruption of oil and gas supplies, especially through the Strait of Hormuz, has increased prices, leading to lower inflation and weakening economic activity.

The OECD has warned that protracted conflict could lead to “severe energy shortages” around the world, with long-term effects including higher fertilizer costs, lower crop yields and higher food prices next year.

In the UK, which remains heavily dependent on imported energy, the impact is worse. Rising fuel costs are being felt at petrol stations and heating bills, while businesses are facing higher input costs across the supply chain.

Along with weak growth, inflation is now expected to rise sharply. The OECD predicts that inflation in the UK will reach 4 per cent this year, from the previous estimate of 2.5 per cent, before falling to 2.6 per cent in 2027, still above previous estimates.

Across the G20, inflation is now expected to reach 4 percent, compared to the previous forecast of 2.8 percent, highlighting the global nature of the price shock.

The combination of slowing growth and rising inflation raises the prospect of a deflationary scenario, making policy decisions difficult for central banks and governments.

Financial markets have begun to adjust to the new outlook, with expectations that the Bank of England may need to delay or postpone planned interest rate cuts.

Mortgage lenders responded by raising rates and canceling hundreds of deals, reflecting concerns about continued inflation and higher borrowing costs.

The change in expectations marks a sharp reversal from the start of the year, when markets expected a gradual easing of monetary policy.

Chancellor Rachel Reeves acknowledged the impact of the dispute but insisted that the government’s economic strategy strengthened the UK’s resilience.

“In an uncertain country we have the right economic plan,” he said, adding that recent policy decisions have put the country in a better position to deal with global instability.

However, opposing figures held the rate cut as evidence of underlying economic weakness. Mel Stride described the forecast as a “bad decision” about the UK’s vulnerability, while the Liberal Democrats called it a “wake-up call” for policymakers.

The effects of the energy shock are already being felt across the corporate sector. Retailers and manufacturers have warned of rising costs associated with fuel, transportation and energy.

Bosses at the UK’s biggest companies have highlighted the growing burden of energy-related costs, with some warning that further increases could force businesses to pass the cost on to consumers.

The deteriorating financial situation also limits the government’s ability to respond with large-scale support measures. Reeves pointed out that any help for households would be targeted and restricted by lending regulations, which would put pressure on public finances.

The OECD stressed that support measures should be “timely and well-targeted”, focusing on vulnerable households and businesses while maintaining incentives to reduce energy consumption.

Beyond the immediate crisis, the OECD highlighted the need for long-term policy changes to reduce dependence on imported fuels and improve energy sustainability.

Investments in renewable energy, energy efficiency and infrastructure are considered essential to mitigate future shocks and stabilize the economy.

The latest forecasts underscore the fragile state of the UK economy, which was already experiencing moderate growth before the conflict.

While global growth is expected to hold around 2.9 percent this year, the UK’s weak performance reflects both external pressures and structural vulnerabilities.

For policymakers, the challenge will be navigating the complex landscape where inflation, energy security and economic growth are increasingly intertwined.

For households and businesses, the message is immediate: the cost-of-living pressures that have characterized recent years may be set to intensify again, as the full impact of the energy shock eats through the economy.