The UK is expected to suffer the greatest economic damage from the ongoing Middle East conflict among the world’s major economies, according to the OECD, which has significantly downgraded its growth forecasts and warned of rising inflation risks.
In its latest outlook, the OECD cut the UK’s growth forecast for 2026 to just 0.7 percent, compared to a previous estimate of 1.2 percent, putting the country among the weakest countries in the G20. Among G7 economies, only Italy is expected to see slower growth, while the UK is also expected to see one of the highest inflation rates in the group.
The downgrade reflects Britain’s vulnerability to rising energy costs, which have risen sharply following the escalation of the US-Israeli conflict with Iran. Interruptions in oil and gas supplies, particularly through the Strait of Hormuz, have driven up wholesale prices, directly impacting inflation and dampening economic activity.
The OECD warned that prolonged conflict could lead to “significant energy shortages” worldwide, with knock-on effects including higher fertilizer costs, lower crop yields and a possible rise in food prices next year.
The impact is particularly severe for the UK, which remains heavily dependent on energy imports. Rising fuel costs are already noticeable at gas stations and in heating bills, while companies across supply chains are faced with higher input costs.
In addition to weaker growth, a significant increase in inflation is now expected. The OECD forecasts UK inflation will reach 4 percent this year, up from a previous estimate of 2.5 percent, before falling to 2.6 percent in 2027, still above previous forecasts.
Inflation in the G20 countries is now expected to average 4 percent, compared with an earlier forecast of 2.8 percent, underscoring the global nature of the price shock.
The combination of slowing growth and rising inflation raises the prospect of a stagflationary environment, making policy decisions more difficult for central banks and governments.
Financial markets have already begun to adjust to the new outlook and it is expected that the Bank of England may have to postpone or reverse planned interest rate cuts.
Mortgage lenders responded by raising interest rates and withdrawing hundreds of deals, reflecting concerns about persistent inflation and higher borrowing costs.
The shift in expectations represents a significant reversal from earlier in the year, when markets had expected a gradual easing of monetary policy.
Chancellor Rachel Reeves acknowledged the impact of the conflict but insisted the government’s economic strategy had strengthened the UK’s resilience.
“In an uncertain world, we have the right economic plan,” she said, adding that recent policy decisions had put the country in a better position to weather global instability.
But opposition figures have interpreted the downgrade as evidence of underlying economic weakness. Mel Stride called the forecast a “devastating verdict” on Britain’s vulnerability, while the Liberal Democrats described it as a “wake-up call” for policymakers.
The impact of the energy shock is already being felt across the corporate sector. Retailers and manufacturers warn of rising costs related to fuel, transportation and energy.
Executives at major British companies have highlighted the growing burden of energy-related spending, with some warning that continued increases could force companies to pass the costs on to consumers.
The deteriorating fiscal situation also limits the government’s ability to respond with large-scale support measures. Reeves has suggested that any support to households will be targeted and constrained by borrowing rules, reflecting pressure on public finances.
The OECD stressed that support measures should be “timely and targeted” and focused on vulnerable households and viable businesses, while maintaining incentives to reduce energy consumption.
Beyond the immediate crisis, the OECD highlighted the need for longer-term policy changes to reduce dependence on imported fossil fuels and improve domestic energy resilience.
Investments in renewable energy, energy efficiency and infrastructure are considered crucial for cushioning future shocks and stabilizing the economy.
The latest forecasts underline the fragile state of the British economy, which was already experiencing modest growth before the conflict.
While global growth is expected to remain at around 2.9 percent this year, the UK’s weaker performance reflects both external pressures and structural vulnerabilities.
The challenge for policymakers is to navigate a complex environment in which inflation, energy security and economic growth are increasingly intertwined.
For households and businesses, the message is more immediate: the pressure on the cost of living that has characterized recent years could intensify again as the effects of the energy shock are felt throughout the economy.
