Britain’s economy is heading for sub-1 per cent growth this year and the unemployment rate is on course to climb to 5.5 per cent, according to the Organisation for Economic Co-operation and Development, which has pinned much of the blame on the fallout from the US-Iran war.
In its latest annual economic outlook, the Paris-based rich-country think-tank said UK gross domestic product would grow by just 0.9 per cent in 2026, down sharply from 1.4 per cent last year. The downgrade reflects the sustained shock to global oil and gas prices triggered when fighting in the Gulf erupted in the spring, choking the Strait of Hormuz and rerouting energy flows that the UK ultimately pays for at the pump and on the meter.
The new projection is, however, a modest improvement on the 0.7 per cent figure the OECD pencilled in back in March, when the conflict was barely three weeks old and crude markets were in free-fall. Should the strait reopen and tanker traffic normalise, growth is forecast to recover to 1.1 per cent in 2027.
For small and medium-sized businesses already wrestling with elevated input costs and softer consumer demand, the labour market warning is arguably the more pressing concern. The unemployment rate, currently 5 per cent, is expected to climb to 5.5 per cent as restrictive borrowing costs and stubborn inflation cool hiring. That half-point rise is the largest forecast across the G7, echoing City warnings earlier this year that Britain’s jobless rate could touch an 11-year high in 2026.
Inflation, by contrast, is now expected to peak slightly lower than feared, at 3.7 per cent rather than the 4 per cent the OECD flagged in the spring. The think-tank expects the Bank of England to deliver a single rate cut next year, trimming the base rate from 3.75 per cent to 3.5 per cent. That tallies broadly with Threadneedle Street’s own cautious holding pattern in recent months, as the Monetary Policy Committee has weighed sticky services prices against a weakening jobs picture.
Rachel Reeves seized on the more flattering elements of the report. “The conflict in the Middle East poses a significant challenge to the world economy,” the chancellor said. “Despite this, the OECD now expects UK inflation to be lower and growth higher than previously thought.”
The OECD itself was rather less sanguine. While it gave qualified approval to Labour’s tight fiscal stance, the budget deficit is forecast to fall from 5.5 per cent of GDP last year to 4.4 per cent by 2027, one of the sharpest consolidations in the bloc, it pressed ministers to keep the discipline going.
“The ongoing fiscal consolidation through a combination of revenue-raising measures, spending cuts, and productivity-enhancing investments remains necessary to rebuild buffers,” the think-tank said in its Economic Outlook. “Planned structural reforms to further expand supply remain necessary, including delivering on the overhaul of infrastructure planning and the simplification of financial services regulation.”
Reeves struck a defiant note in response. “We have the right economic plan, and changing course would put that progress at risk, with families and businesses paying the price. Through stability, investment and reform we will build a stronger, more secure Britain.”
Perhaps the most uncomfortable finding in the report concerns who bears the cost. The poorest fifth of British households spend 8.5 per cent of their income on energy and gas, a higher share than in any other major advanced economy, and more than double the equivalent figure of under 4 per cent in Australia. For owner-managed firms in hospitality, retail and small-scale manufacturing, that translates into squeezed customers with less to spend at the till.
Global growth is now expected to slow to 2.8 per cent this year from 3.4 per cent in 2025, provided the strait reopens within months. If the conflict drags into 2027, the OECD warns world output could sink to 2.1 per cent this year and just 1.8 per cent next, with several energy-import-dependent economies likely to tip into recession.
“The consequences would be global but could prove especially severe for developing economies with limited energy reserves, higher shares of energy and food in household consumption, constrained fiscal capacity and weak social safety nets, low private savings buffers and more fragile currencies,” said Stefano Scarpetta, the OECD’s chief economist.
“The vulnerability of our economies to one single chokepoint demonstrates the need for intensifying efforts to strengthen the resilience of supply chains, in this case, particularly to diversify energy supply, and to improve energy efficiency.”
For Britain’s SME owners, the OECD’s verdict offers little immediate comfort: weaker growth, a softer jobs market, and a Bank of England keeping its powder dry until inflation moves decisively in the right direction. The hope is that the geopolitical fever breaks before the economic one does.
