UK faces slower growth and rising unemployment, OECD warns

Highlights

• UK GDP forecast to grow just 0.9 per cent in 2026, down from 1.4 per cent last year
• Unemployment expected to rise from 5 per cent to 5.5 per cent, biggest increase in the G7
• Inflation is now forecast to peak at 3.7 per cent, lower than earlier estimate of 4 per cent
• Bank of England expected to make just one rate cut next year, to 3.5 per cent

BRITAIN's economy will grow by less than one per cent this year, and unemployment will climb to its highest level in years, a global thinktank has warned.

The Organisation for Economic Co-operation and Development (OECD) said UK gross domestic product would expand by just 0.9 per cent in 2026, down from 1.4 per cent last year, as the US-Iran war continues to push up global energy prices, the Times reported.

The forecast, published in the OECD's annual economic outlook, marks an improvement on the body's March estimate of 0.7 per cent, made shortly after the conflict broke out.

Currently at five per cent, the jobless rate is expected to rise to 5.5 per cent, the steepest increase among G7 nations, as high inflation and elevated interest rates cool the labour market.

According to the report, inflation is now forecast to peak at 3.7 per cent this year, slightly below the 4 per cent the OECD predicted in the spring.

However, growth is expected to recover to 1.1 per cent next year if the conflict ends and energy shipments resume through the Strait of Hormuz.

'Ongoing conflict a concern'

The OECD warned that if fighting drags into next year, global output could fall to as low as 1.8 per cent in 2027, tipping some energy-dependent economies into recession.

The OECD expects the Bank of England to cut interest rates just once next year, from 3.75 per cent to 3.5 per cent. It urged the government to press ahead with its fiscal consolidation plan, noting that the budget deficit was on track to narrow from 5.5 per cent of GDP last year to 4.4 per cent in 2027, one of the sharpest reductions among wealthy nations.

The thinktank called for continued spending discipline alongside reforms to infrastructure planning and financial services regulation.

Chancellor Rachel Reeves said the Middle East conflict posed "a significant challenge to the world economy" but welcomed the revised figures, noting that the OECD now expected UK inflation to be lower and growth higher than previously thought.

Rachel Reeves Getty Images

"We have the right economic plan and changing course would put that progress at risk," she said.

The OECD also highlighted that Britain's poorest households face a heavier energy burden than their counterparts in other major economies, with the lowest fifth of earners spending 8.5 per cent of their income on energy and gas — more than double the rate seen in Australia.

Stefano Scarpetta, the OECD's chief economist, said the crisis had exposed dangerous reliance on a single shipping route. "The vulnerability of our economies to one single chokepoint demonstrates the need for intensifying efforts to strengthen the resilience of supply chains," he was quoted as saying.