The Organisation of Economic Co-operation and Development (OECD) has slashed its 2026 growth forecast for the UK to just 0.7% from a previous estimate of 1.2%.
This represents the biggest cut the organisation has made among the world’s largest economies.
Its forecast for UK growth in 2027 remained the same at 1.3%.
The move reflects the already weak state of the UK economy combined with its vulnerability to the disruption the global trade and energy markets being caused by the war in the Middle East.
The OECD also updated inflation expectations in light of the conflict, and bumped up its forecast for the UK to 4% and the US to 4.2%.
With both these figures at least double the targets for the respective central banks, it would suggest no further interest rate cuts will be forthcoming this year and could even put rate rises on the table.
With peace talks between the US and Iran reportedly underway, the situation could quickly improve and render the forecasts outdated though.
See also: Markets whipsaw as Trump reveals peace talks with Iran
There is also clearly a risk that further escalation occurs rather than resolution.
Lindsay James, investment strategist at Quilter, said: “While the UK should still see some growth this year, albeit minimal, it will depend heavily on how the conflict in Iran plays out.
“There’s a risk that a resolution could take months rather than weeks unless anything changes soon, and we can expect energy prices to remain structurally higher for some time even after that.
“The world has realised that Iran has the means to fully control the Straits, incidentally something military experts have long been aware of, meaning that concerns will remain that they can again use this leverage in future disagreements or consider a more permanent form of ‘toll booth’ for shipping,” James added.
“It remains the case that the situation could worsen further still, which would have a significant knock-on effect on economies,” the Quilter strategist said. “While it is hoped that a resolution will be achieved sooner rather than later, there’s a risk that the OECD’s outlook becomes a best case scenario.”
Dan Coatsworth, head of markets at AJ Bell, added: “Conflict in the Middle East could have damaging consequences for the UK economy and other parts of the world if the crisis is long-lasting.”
He continued: “That’s the implication of a new report from the OECD.”
The longer the Middle East crisis lasts, the larger the potential economic hit will be for consumers and businesses, according to the AJ Bell analyst.
“The last thing Chancellor Rachel Reeves wants is for her growth plan to be derailed, but it’s clear that she needs to consider such a scenario.”
