UK set for faster growth in 2026, slower inflation, OECD forecasts

LONDON, Dec 2 (Reuters) - Britain's economy will grow more faster than previously expected next year, the OECD said on Tuesday, citing the impact of finance minister Rachel Reeves' budget on consumption and drag from global uncertainty that could keep pressure on inflation.

The Paris-based organisation raised its 2026 forecast for British economic growth to 1.2% from 1% in its previous forecast in September. It sees gross domestic product expanding 1.3% in 2027.

"Continuing to ensure that consolidation is carefully timed, given substantial downside risks to growth and upside risks to inflation, and well-calibrated, with a combination of revenue raising measures and spending cuts, is essential," the OECD said in its latest global outlook.

Finance minister Rachel Reeves announced increases to government spending in her November 26 budget, paid for by higher state borrowing and hiking taxes on workers, people saving for pensions and investors.

Reeves welcomed the forecasts, saying that last week's budget had cut waiting lists on the country's national health service, borrowing and debt, as well as the cost of living.

The OECD expects Britain's government deficit to remain large, but to narrow from 5.9% of GDP in 2025 to 5.1% in 2027, with total revenue reaching 40% of economic output.

It said consumer price inflation was likely to average 3.5% this year - higher than in any other G7 country - before easing to 2.5% in 2026, and 2.1% in 2027.

The inflation forecast for next year was in line with estimates from Britain's budget watchdog, published last week.

"Elevated inflation expectations and potential second-round effects from increases in payroll taxes and the minimum wage, as well as from high food inflation, constitute an upside risk to prices," the OECD said, adding this could prompt the Bank of England to keep interest rates higher for longer, and pose a downside risk to economic growth.

With public finances stretched, the OECD warned that Britain's government had limited capacity to deal with potential shocks to the economy in the future.

(Reporting by Suban Abdulla, editing by Andy Bruce)