The UK economy is set for stronger growth than previously expected this year but saw its outlook cut for 2027 amid concerns over the continued impact from the war in Iran, new forecasts have shown.
The Organisation of Economic Co-operation and Development (OECD) warned the conflict is uncertain but “its economic consequences are likely to be felt for some time even after its resolution”.
It cautioned that some countries could enter recession or witness energy shortages if the conflict drags into 2027.
In its latest forecast, it predicted that UK gross domestic product (GDP) will see growth slow to 0.9%, from 1.4% last year.
The drop will be linked to renewed inflationary pressures “squeezing real incomes” and the impact on consumer spending and investment.
Nevertheless, it is stronger than the 0.7% growth previously predicted by the OECD in March, with the improved outlook partly linked to 0.6% growth in the first quarter of this year.
The OECD, however, cut its growth forecast for next year to 1.1%, from 1.3%, amid a steady recovery following the impact of disruption from the conflict.
Forecasts predicted that global economic growth will slow to 2.8% this year, from 3.4% in 2025.
But the OECD said that global growth would slow to as low as 2.1% this year, and 1.8% next year, if “disruptions persist well into 2027”.
The will would result in “potentially pushing some economies into or close to recession”, the economic body said.
Meanwhile, UK inflation is expected to accelerate further as higher fuel and energy prices linked to the conflict hit households and firms.
It said inflation – which was most recently recorded at 2.8% in April – will rise to 3.7% this year and then slow down to 2.4% next year.
This is lower than the previous predictions of 4% for 2026 and 2.5% for 2027.
“Further easing in monetary policy is expected, with the Bank of England looking through the energy shock in 2026 and moving to a neutral stance in 2027 as underlying price pressures ease,” the report added.
Meanwhile, it indicated that unemployment would continue to rise, predicting it would strike 5.5% this year before slowing to 5.3% next year.
Chancellor of the Exchequer Rachel Reeves said: “The conflict in the Middle East poses a significant challenge to the world economy.
“Despite this, the OECD now expects UK inflation to be lower and growth higher than previously thought.
“We have the right economic plan and changing course would put that progress at risk, with families and businesses paying the price.”