UK faces biggest hit to growth from Iran war of all major economies, OECD warns as inflation set to surge

Britain faces the biggest hit to growth from the conflict in the Middle East of all major global economies, according to an influential global policy group that has warned inflation will rise to 4 per cent this year.

The Organization for Economic Co-operation and Development (OECD) has warned that the conflict is worsening the outlook for many of the world’s largest economies, but the UK looks set to be hit particularly hard; The 2026 growth forecast was cut to 0.7 percent from the previous forecast of 1.2 percent, the largest cut among all G20 countries.

The UK is also on track to have the highest inflation in the G7 after the US and the second lowest growth behind Italy.

The OECD has warned that the disruption to oil and gas supplies caused by the Iran war, as well as fertilizer shortages, could lead to rising food prices if the conflict continues for a long time.

The company expects inflation in the UK to rise to an average of 4 percent in 2026, from the 2.5 percent forecast in its last report in December.

This rate will drop to 2.6 percent in 2027; This rate is still above the previous estimate of 2.1 percent.

Economic growth across the G20 group of developed countries, which includes countries such as China, India and Saudi Arabia, is projected to weaken in the near term before gradually picking up again by 2027.

But an “unexpectedly sharp rise in energy prices” could weaken growth further than the baseline forecast the OECD has warned against; It could cut European growth by 0.4 percent this year and nearly 0.8 percent next year, pushing some of Europe’s biggest economies, such as the UK, even closer to potential recession.

While the OECD said there were many uncertainties surrounding conflicts in the Middle East, it warned that prolonged shutdowns of energy infrastructure and shipping could have much greater consequences than currently expected.

According to the report, a sustained increase in global energy prices will significantly increase operating costs and increase inflation, which will put pressure on growth.

“A prolonged period of blackouts could also lead to significant energy shortages that would further reduce growth,” the OECD said.

The OECD says governments should encourage homes and businesses to be more efficient in their use of energy.

It also backed Chancellor Rachel Reeves’ plan to support households most in need.

But in the long term, he argued, countries need to do more to reduce their dependence on fossil fuel imports, which makes them vulnerable to geopolitical shocks.

The report cited some Asian governments that have already taken steps to reduce the risk of famine, such as energy rationing for businesses in India and energy export restrictions in China.

Additionally, the report warned of a sharp rise in fertilizer prices since conflict escalated in late February, as regions in the Middle East are major producers of substances such as urea and ammonia.

The OECD warned that supply shortages could “increase global food prices, with potentially serious impacts on household finances and inflation expectations.”

The world’s central banks must remain “vigilant” to keep inflation under control in response to rising risks to global prices, the organisation’s economists said.

Experts said it was too early to say whether the Chancellor should respond to the crisis by relaxing strict fiscal rules that prevent him from borrowing to pay for day-to-day expenses and require debt to fall as a percentage of GDP by 2029/30.

But shadow chancellor Sir Mel Stride accused the chancellor of “making choices that weaken our economy at the worst possible moment”.

He said: “This downgrade from the OECD is a damning verdict on how vulnerable our economy is thanks to Labour. Rachel Reeves increased borrowing, spending and taxes. As a result, our growth stagnated while inflation, unemployment, deficit and debt interest costs soared. At the same time, Ed Miliband’s obsession with net zero has left us reliant on imported energy rather than tapping into our own resources in the North Sea.”

Ms Reeves said: “The war in the Middle East is not one that we started or participated in, but it is a war that will affect our country.

“We have the right economic plan in an uncertain world. The decisions we have made have put us in a better position to protect the country’s finances and family finances from global instability.

“Our economic plan means going further to build a stronger, safer economy. This means going further on our three big options: strengthening regional growth, embracing artificial intelligence and innovation, and building a closer relationship with the EU.”