The Organization for Economic Co-operation and Development (OECD) has issued updated forecasts indicating that the UK’s economic growth this year will be stronger than previously anticipated, but warned that ongoing conflicts in the Middle East, particularly the situation involving Iran, could pose significant risks to global and domestic economies if they persist into 2027.

In its latest economic outlook, the OECD raised its UK growth forecast for 2026 to 0.9%, an increase from the 0.7% projection made in March, though this still represents a slowdown from last year’s 1.4% growth. The outlook for 2027 was revised downward to 1.1%, from an earlier estimate of 1.3%. The organization attributed the expected decline primarily to inflationary pressures driven by higher fuel and energy costs, which are squeezing real incomes and constraining consumer spending and investment.

Globally, the OECD projects growth to ease to 2.8% in 2026, down from 3.4% in 2025. However, it cautioned that if the conflict involving Iran continues beyond this year without resolution, global growth could slow substantially to as low as 2.1% this year and 1.8% next year. In such a prolonged scenario, some economies may face recessionary conditions, with emerging markets seen as particularly vulnerable.

Energy supply risks are a major concern connected to the ongoing conflict. The OECD highlighted potential shortages of oil and gas that could lead to rationing for businesses, alongside rising costs for fertilizers and industrial chemicals such as sulfur and helium. In the UK, rural areas could be especially affected by diesel shortages, potentially disrupting economic activity. Additionally, low jet fuel inventories could impact sectors reliant on air transport, including pharmaceuticals and tourism.

Inflationary pressures are expected to peak in the third quarter of 2026, with overall inflation averaging 3.7% this year before easing to 2.4% in 2027, slightly above target levels. This forecast is somewhat lower than previous estimates, which had predicted inflation rates of 4% for 2026 and 2.5% for 2027. The OECD also suggested that the Bank of England might begin to ease monetary policy in 2026 and adopt a neutral stance by 2027 as core price pressures diminish.

Rachel Reeves, the UK Chancellor, acknowledged the economic challenges posed by the Middle East conflict but emphasized that the updated forecasts still show improved growth and lower inflation compared to earlier predictions. She stated that the government’s current economic plan remains appropriate and warned that altering course now could jeopardize progress and impose additional costs on households and businesses.