Finance
UK Suffers OECD's Biggest Growth Downgrade as Iran War Pushes up Energy Costs
Published by Global Banking & Finance Review®
Posted on March 26, 2026
2 min readLast updated: March 26, 2026
Add as preferred source on GoogleQuick Summary
The OECD's March 26, 2026 interim forecast slashes the UK's 2026 growth forecast to 0.7%, the steepest cut among major economies, amid surging energy costs from the Iran war. Inflation projections were also sharply raised, particularly for 2026 and 2027.
UK Faces Largest OECD Growth Downgrade as War Spurs Energy Price Hike
OECD Forecast Update and Economic Impact on the UK
By David Milliken
LONDON, March 26 (Reuters) - Britain's economic growth prospects this year received the sharpest downgrade of any major economy in the OECD's interim forecast update on Thursday following the U.S.-Israeli war on Iran, while inflation is set to rise faster too.
The Paris-based international body cut its 2026 forecast for British economic growth by half a percentage point to 0.7%, compared with a 0.4 percentage point downgrade for the euro zone and a 0.3 percentage point upgrade for the United States.
OECD Report Highlights
"Planned fiscal tightening and higher energy prices are anticipated to keep growth subdued in the United Kingdom, though the impact will be attenuated by lower policy rates next year," the OECD said in its report.
Key Forecasts and Revisions
- Britain's growth forecast for 2027 is unchanged at 1.3%
- Britain's inflation forecast for 2026 is revised up by 1.5 percentage points from December to 4.0%, the biggest upward revision of any large, advanced economy
- UK inflation in 2027 is forecast to be 2.6%, 0.5 percentage points higher than in December and above the Bank of England's 2% target
Energy Prices and Household Impact
- Poorer UK households spend more on gas and electricity than in other rich countries, though total energy spending makes up a smaller share of UK inflation than elsewhere
- The OECD expects the BoE to keep interest rates unchanged this year then cut in Q1 2027 as inflation eases
Comparative Economic Forecasts
- Britain's Office for Budget Responsibility, in forecasts finalised just before the start of the conflict, predicted GDP growth of 1.1% this year and 1.6% in 2027
- The BoE this month forecast inflation would rise to 3.0-3.5% over the next couple of quarters
Government Response and Policy Focus
Prime Minister and Finance Minister Statements
- Prime Minister Keir Starmer has made boosting growth and reducing the cost of living top goals for his government
- Finance minister Rachel Reeves said the forecasts showed the war in the Middle East was affecting Britain but she would still focus on "regional growth, embracing AI and innovation, and establishing a closer relationship with the EU"
(Reporting by David Milliken; editing by Suban Abdulla and Andy Bruce)
Key Takeaways
- •UK’s 2026 GDP growth forecast downgraded by 0.5 percentage point to 0.7%, the largest drop among major OECD economies (apnews.com).
- •Inflation forecast for 2026 revised up by 1.5 points to 4.0%, the biggest hike among advanced economies; 2027 inflation now expected at 2.6%, above the BoE’s 2% target (apnews.com).
- •Poorer UK households face disproportionate spikes in energy spending on gas and electricity, though energy contributes a smaller share to overall UK inflation than in other rich countries (apnews.com).
References
Frequently Asked Questions about UK suffers OECD's biggest growth downgrade as Iran war pushes up energy costs
1How will UK inflation be affected in the coming years?
UK inflation for 2026 was revised up by 1.5 percentage points to 4.0%, with 2027 inflation forecast at 2.6%, remaining above the Bank of England’s 2% target.
2What are the expectations for UK interest rates?
The OECD expects the Bank of England to keep interest rates unchanged this year and cut them in Q1 2027 as inflation eases.
