Britain is facing weaker economic growth and a new surge in inflation as the ongoing conflict in the Middle East threatens global energy and food supplies, according to new forecasts.
The Organisation for Economic Co-operation and Development (OECD) has warned that a prolonged war could drive up the costs of oil, gas, and fertilisers, worsening the economic outlook for major economies.
In its latest interim projections, the OECD stated that UK inflation is expected to be 1.5 percentage points higher this year than previously anticipated.
The Consumer Prices Index (CPI) inflation is now projected to average 4% in 2026, an increase from the 2.5% forecast in December, before easing to 2.6% in 2027. Consequently, the UK is expected to record the second-highest inflation rate in the G7, surpassed only by the United States.
Simultaneously, growth in the UK is projected to weaken. The OECD has downgraded its forecast for UK GDP in 2026 to 0.7%, which is 0.5 percentage points lower than earlier expectations, leaving Britain with the second-slowest growth in the G7, ahead of only Italy.
The deteriorating outlook is primarily driven by disruptions linked to the conflict in Iran. The OECD cautioned that prolonged instability could lead to global energy shortages, especially if critical infrastructure or shipping routes are affected. Such a situation would increase business costs, fuel inflation, and further hinder economic growth. The report stated, “A prolonged period of disruption could also result in the emergence of significant energy shortages that would further lower growth.”
Rising fertiliser costs present an additional threat. The Middle East is a major supplier of key inputs such as urea and ammonia, and any shortages could cause global food prices to spike, further straining household finances.
Across the G20, growth is expected to weaken in the short term before gradually recovering by 2027. Some countries have already begun implementing defensive measures, including energy rationing in India and export restrictions in China. The OECD urged central banks to remain “vigilant” amid renewed inflation risks and called on governments to improve energy efficiency and reduce reliance on fossil fuel imports over the long term.
In response to the report, Rachel Reeves noted that the conflict is already having consequences domestically. “This is not a war we started, nor one we have joined — but it will impact our country,” she said. The Chancellor emphasised that the government’s economic strategy would help shield households and businesses, highlighting plans to boost regional growth, accelerate AI investment, and strengthen ties with Europe. “In an uncertain world, we have the right economic plan,” she added.
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