Britain’s economy is set to expand by less than 1 per cent this year, while unemployment is expected to climb to 5.5 per cent, according to the Organisation for Economic Co-operation and Development (OECD), which has pointed to the ripple effects of the US-Iran conflict as a major source of global disruption.
In its latest Economic Outlook, the Paris-based institution forecast UK gross domestic product growth of just 0.9 per cent in 2026, down from 1.4 per cent last year. The downgrade reflects the sustained impact of higher oil and gas prices following fighting in the Gulf, which disrupted shipping through the Strait of Hormuz and tightened global energy supply. A partial improvement is expected in 2027, when growth could recover to 1.1 per cent if energy routes stabilise.
While the growth outlook has been slightly upgraded compared with earlier estimates, the labour market picture has deteriorated. The OECD expects unemployment to rise from 5 per cent to 5.5 per cent, marking one of the steepest increases among advanced economies. The organisation attributed the rise to persistent inflation pressures and high borrowing costs that are weighing on hiring decisions across businesses.
Inflation is now projected to peak at 3.7 per cent, slightly below earlier forecasts, offering some relief to policymakers. Even so, the OECD expects the Bank of England to proceed cautiously, with just one interest rate cut next year, lowering the base rate from 3.75 per cent to 3.5 per cent. The central bank has remained cautious as services inflation proves sticky while signs of labour market softening emerge.
Chancellor Rachel Reeves highlighted the improved inflation outlook, saying the UK was performing better than previously expected despite global instability. However, the OECD urged continued fiscal discipline, projecting that the UK deficit will fall from 5.5 per cent of GDP to 4.4 per cent by 2027. It also called for deeper structural reforms, including improvements to infrastructure planning and financial regulation, to strengthen long-term productivity.
The report also highlighted uneven impacts across society. It noted that the poorest fifth of UK households spend around 8.5 per cent of their income on energy, one of the highest proportions among developed economies. This leaves lower-income families and small businesses particularly exposed to energy price shocks and weak consumer demand.
Globally, the OECD expects growth to slow to 2.8 per cent this year, with further declines possible if the Middle East conflict continues into next year. In a more severe scenario, world growth could fall to 2.1 per cent this year and 1.8 per cent in 2027, with energy-import-dependent economies most at risk.
OECD chief economist Stefano Scarpetta warned that reliance on a single energy chokepoint exposes structural weaknesses in the global economy and stressed the need for diversified supply chains and improved energy resilience.
For the UK, the message is clear: subdued growth, rising unemployment, and limited monetary easing remain the baseline, with recovery dependent on both global stability and domestic economic adjustment.
