Britain’s economic recovery is set to lose momentum next year as higher energy prices and elevated borrowing costs weigh on growth, in a fresh challenge for Prime Minister Andy Burnham’s ambitions to accelerate the economy.
The Organisation for Economic Co-operation and Development has upgraded its assessment of the UK’s performance this year, but expects growth to moderate in 2027 as the economic effects of the prolonged Middle East conflict continue to work through energy prices and household incomes.
The OECD said the global economy had proved more resilient than expected during 2026, with artificial intelligence investment helping to offset some of the damage from the energy shock. But it warned that renewed inflationary pressures and uncertainty were clouding the outlook. Global growth is forecast at 2.9% in 2026 before easing to 3% next year.
For Britain, the latest forecasts point to a particularly difficult combination: weaker growth alongside inflation that takes longer to return to the Bank of England’s 2% target.
The UK economy is expected to grow by 1.1% this year, according to the figures supplied, an upgrade from the OECD’s previous 0.9% projection. The improvement reflects stronger domestic demand, including a solid second quarter.
But growth is then expected to slow to 1% in 2027, as the global economy moderates and higher energy prices and interest rates weigh on activity.
The OECD has previously warned that high and volatile energy prices, fiscal pressures and weak productivity are significant constraints on Britain’s growth prospects. Its earlier UK assessment projected growth of 0.9% in 2026 and 1.1% in 2027, highlighting the drag from renewed inflation and uncertainty.
Inflation provides a further headache.
UK consumer price inflation is expected to average 3.1% this year, according to the new forecast, below the OECD’s previous estimate of 3.6%. But the improvement is not expected to translate into a rapid return to price stability.
Inflation is forecast at 2.6% next year, above the OECD’s previous 2.4% projection. Across the G20, inflation is expected to reach around 3.6% in 2027, reflecting the persistence of the energy shock.
The Bank of England is already confronting renewed pressure from energy costs. The central bank held Bank Rate at 3.75% last week, with policymakers divided over whether the inflationary consequences of the Middle East conflict could require tighter policy.
Higher rates are particularly significant for Britain because government borrowing costs have also risen sharply. The OECD warned that elevated long-term sovereign yields are increasing fiscal pressures internationally, while the IMF has stressed that governments need credible plans to contain debt and borrowing costs.
IMF managing director Kristalina Georgieva said global shocks had been pushing debt levels “up like a staircase not to heaven”, while warning that governments had taken “no action to contain that service cost”.
OECD secretary-general Mathias Cormann said central banks “must act if price pressures sharpen”.
The organisation’s chief economist Stefano Scarpetta also highlighted the importance of the technology investment boom supporting global activity, warning that any “drop off” could become a major source of risk.
“If investment slows, if productivity outcomes aren’t meeting expectations, then there are significant global risks,” he said.
Treasury minister Emma Reynolds sought to emphasise the resilience of the UK economy.
“Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience,” she said.
“We will face these challenges together and we are already giving families space to breathe. We had the fastest growth in the G7 in the first half of the year and we are starting the big, long-term changes needed to create good jobs and growth in every postcode.”
Conservative shadow chancellor Andrew Griffith said: “The OECD have downgraded the UK’s growth for 2027 to just a third of the average growth rate of the G20.
“We can and should aspire to do much better.”
The latest projections leave the Burnham government facing a difficult economic backdrop: growth remains positive, but inflation is proving more persistent than hoped, borrowing costs remain elevated and global energy markets remain exposed to geopolitical shocks.
The OECD’s broader message is that the world economy has absorbed another major shock better than expected — but that resilience should not be confused with immunity.
For Britain, the challenge will be whether stronger domestic demand and investment can generate enough momentum to offset the continuing drag from energy prices, high interest rates and weak productivity.
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