The UK will grow by less than expected next year amid the ongoing US-Israel war in Iran, an international agency has said.
It is one of many countries whose economic prospects are facing a hit due to the prolonged conflict, the Organisation for Economic Co-operation and Development (OECD) said.
The downgrade to the UK’s economic growth outlook is moderate, according to the OECD, which predicted it will grow by 1% in 2027, against an earlier forecast of 1.1%.
The agency also upgraded the UK’s growth outlook for 2026, from an expected 0.9% to 1.1% for the year.
The prediction comes as Chancellor John Healey prepares to deliver his first Budget at the end of October.
Prime Minister Andy Burnham has made easing the cost of living for households one of his key aims, while the government is under pressure to spend more on defence.
However, Burnham and Healey face a difficult balancing act, trying to offer more support to households while sticking to Labour’s manifesto commitments on tax and the government’s self-imposed fiscal rules.
Inflation has also pushed up the cost of interest on government debt, which alongside an unexpected surge in government borrowing in August has added to the pressure on Healey.
In the short-term, UK growth in 2026 is expected to be higher than the OECD predicted in June after “solid domestic demand growth”.
But it will be lower than predicted in 2027 as higher fuel prices eat into growth. The effects of this depend on how long supply disruptions last, it said. Stockpiles of oil and supplies from outside the Gulf states have helped cushion the effects on economies so far, it said.
Risks to the global economy include the war in the Middle East and climate-change related supply shocks, the OECD said.
Next year, global growth is expected to also be 0.1% lower, with countries affected including Australia, Canada, and the Euro-area.
Conflict in the Middle East has contributed to higher oil and gas prices globally, pushing up inflation in countries including the UK.
Weather-related shocks, including from a strong El Nino, could hit farmers and help push up food prices, it added.
In addition, tariffs and export restrictions on trade continue to add to uncertainty, it said. New US tariffs from July as part of the Trump administration’s ongoing volatile trade policy have raised its effective tariff rate by 1%.
Chief Secretary to the Treasury Emma Reynolds said: “Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience.”
She added that the government is “already giving families space to breathe” and “starting the big, long-term changes needed to create good jobs and growth in every postcode”.
However, Conservative shadow chancellor Andrew Griffith said the OECD urges countries to “control spending and improve public sector efficiency”.
“Instead, this government is trying to find new ways to tax you whilst having to pay interest rates on their borrowing which are the highest in the G7,” he said.
