London, March 26 - The OECD's latest interim forecast trimmed Britain's economic growth prospects for 2026 more than for any other large economy in its update, and it also pushed up near-term inflation expectations. The Paris-based organisation cut its UK growth forecast for 2026 by 0.5 percentage points to 0.7%.
By comparison, the euro zone saw a 0.4 percentage point reduction and the United States received a 0.3 percentage point upward revision in the same update. The OECD identified higher energy costs stemming from the U.S.-Israeli war on Iran and planned fiscal tightening as primary reasons for a weaker growth profile in the United Kingdom, while noting that lower policy rates next year should partially blunt the slowdown.
Key numerical revisions and projections
- UK 2026 growth forecast lowered to 0.7% - a cut of 0.5 percentage points.
- UK 2027 growth forecast left unchanged at 1.3%.
- UK inflation for 2026 revised higher by 1.5 percentage points from December, now projected at 4.0% - the largest upward revision among advanced economies.
- Inflation for 2027 is projected at 2.6%, 0.5 percentage points above the December projection and above the Bank of England's 2% target.
The OECD highlighted distributional differences in energy spending, noting that poorer households in the UK devote a larger share of their budgets to gas and electricity than their counterparts in other wealthy countries. However, it also stated that total energy spending represents a smaller component of the UK's headline inflation measure than in some other nations.
On monetary policy, the OECD expects the Bank of England to maintain current interest rates through this year and to begin cutting rates in the first quarter of 2027 as inflation eases. This outlook sits alongside other domestic forecasts: the UK Office for Budget Responsibility, whose projections were finalised just before the start of the conflict, put GDP growth at 1.1% for this year and 1.6% for 2027; and the Bank of England itself projected earlier this month that inflation would climb to between 3.0% and 3.5% over the next couple of quarters.
Political and policy responses were also highlighted. Prime Minister Keir Starmer has prioritised raising growth and lowering the cost of living. Finance Minister Rachel Reeves acknowledged that the forecasts showed the Middle East conflict was having an impact on Britain, and stated she will remain focused on regional growth, embracing AI and innovation, and forging a closer relationship with the European Union.
The OECD update therefore paints a picture of subdued near-term expansion for the UK driven by external energy shocks and domestic fiscal tightening, tempered somewhat by the prospect of lower policy rates in 2027 and ongoing government efforts to prioritize growth and cost-of-living measures.