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OECD slashes UK growth forecast as Iran war disrupts global economy
The UK is projected to suffer the largest economic slowdown among G20 nations this year due to the escalating conflict involving Iran, according to the Organisation for Economic Co-operation and Development (OECD). Growth is now forecast at 0.7%, a steep decline from the previous 1.2% estimate, while inflation is expected to surge higher than previously anticipated.
Energy shocks and inflation fears grip global markets
The OECD warned that prolonged hostilities could trigger severe energy shortages worldwide. Disruptions to the Strait of Hormuz-a critical oil shipping route-and damage to Middle Eastern energy infrastructure have already sent wholesale oil and gas prices soaring. Fertilizer costs have also spiked, raising concerns about reduced crop yields and higher food prices in 2027.
Global inflation across G20 economies is now projected at 4%, up sharply from the earlier 2.8% forecast. The UK's inflation rate is expected to reach 4% this year, revised upward from 2.5%, before easing to 2.6% in 2027-still above the previous 2.1% estimate.
UK households and businesses feel the strain
Rising energy costs are already hitting consumers, with UK drivers paying more for petrol and diesel, and heating oil prices climbing. Mortgage lenders have responded by raising rates and cutting hundreds of mortgage deals. Retailers are also warning of mounting pressures.
"Policy costs on our energy bills have skyrocketed in recent years-these are tariffs the government imposes to fund its policies, unrelated to oil and gas prices," said Stuart Machin, CEO of Marks & Spencer, in a LinkedIn post.
Next, another major UK retailer, anticipates £15 million in additional costs-including fuel and air freight-if the Iran conflict persists for three months. While the company has offset some expenses through savings, it warned that prolonged disruptions could lead to higher prices for consumers.
Political blame game over economic vulnerability
The UK's Office for Budget Responsibility (OBR) had already trimmed its 2026 growth forecast to 1.1% from 1.4% in early March, before the Iran conflict escalated. The OBR cautioned that the war could have a "very significant" impact on the economy.
Chancellor Rachel Reeves attributed the economic challenges to global instability but defended the government's approach. "In an uncertain world, we have the right economic plan to protect the country's finances and household budgets," she stated.
Opposition parties seized on the downgrade. Shadow Chancellor Mel Stride blamed the government's policies, calling the forecast a "damning verdict on how vulnerable our economy is thanks to Labour." The Liberal Democrats described it as a "wake-up call" over the government's "anti-growth agenda."
OECD urges targeted support and energy independence
The OECD's projections assume energy market disruptions will ease, with oil, gas, and fertilizer prices declining from summer onward. It recommended that government interventions to cushion households from higher energy costs should be "timely, well-targeted, and temporary," focusing on those most in need while preserving incentives to reduce energy use.
Reeves indicated that any support measures would be constrained by borrowing rules and the goal of keeping inflation and interest rates low. The OECD also stressed the need for policies that reduce reliance on imported fossil fuels over the medium term.
Uncertainty clouds economic outlook
While the OECD's forecasts provide a guide, the organization acknowledged that predictions could shift due to the volatile nature of the conflict and its broader economic ripple effects. Analysts warn that sustained high energy prices could further dampen growth, delay interest rate cuts, and exacerbate inflationary pressures.
