26th Mar 2026 10:15
(Alliance News) - The UK is set to face significantly weaker economic growth this year and surging inflation, with a prolonged war in the Middle East risking global energy shortages and higher food prices, new forecasts shows.
The conflict has worsened the outlook for many of the world's largest economies, the Organisation of Economic Co-operation & Development said.
As well as oil and gas supply disruption caused by the Iran war, fertiliser shortages could send food prices soaring if the conflict is long-lasting, the OECD warned.
In its interim economic outlook, the influential organisation said UK Consumer Prices Index inflation will be 1.5 percentage points higher this year than it had been forecasting a few months ago.
It is now expecting UK inflation to average 4% in 2026, up from the 2.5% forecast in its last report in December, and then decline to 2.6% in 2027, which is up from the previous projection of 2.1%.
This means the UK is headed towards the second-highest inflation rate this year in the G7 group of advanced economies, behind only the US.
The OECD also downgraded its outlook for UK gross domestic product, predicting it will be 0.5 percentage points lower in 2026 than prior forecasts, at 0.7%, before rising to 1.3% in 2027, which has not changed.
This puts the UK at second-lowest in the G7 in terms of economic growth this year, behind only Italy.
Across the G20 – which incorporates countries including China, India and Saudi Arabia – economic growth is projected to weaken in the near term before gradually rising through 2027.
Chancellor Rachel Reeves responded to the report to say the war in the Middle East "is not one that we started, nor is it a war that we have joined", adding: "But it is a war that will have an impact on our country."
The OECD said there were a lot of uncertainties about the conflict in the Middle East but that longer-lasting closures to energy infrastructure and shipping could have much bigger consequences to global economies than was currently expected.
A sustained spike in global energy prices will add significantly to business costs and raise inflation, which would weigh on growth, according to the report.
"A prolonged period of disruption could also result in the emergence of significant energy shortages that would lower growth further," the OECD said.
It referred to some Asian governments which have already taken steps to mitigate the risk of shortages, such as energy rationing for businesses in India and energy export restrictions in China.
Furthermore, the report warned over a sharp increase in fertiliser prices since the conflict escalated at the end of February, with regions in the Middle East big producers of things like urea and ammonia.
Supply shortages "could increase global food prices, with potentially serious impacts to household finances and inflation expectations", the OECD warned.
The organisation's economists said the world's central banks need to stay "vigilant" to keep inflation under control in response to the increased risks to global prices.
It added that governments should encourage more efficient energy use in homes and across industries while making sure that support to offset higher energy prices is targeted at households most in need.
In the longer term, it argued that governments need to do more to reduce dependence on fossil fuel imports which would make them less vulnerable to geopolitical shocks.
Reeves added: "In an uncertain world we have the right economic plan. The decisions we have taken have put us in a better position to protect the country's finances and family finances from global instability. Our economic plan means going further to build a stronger, more secure economy.
"That means going further on our three big choices: empowering regional growth, embracing AI and innovation, and establishing a closer relationship with the EU."
By Anna Wise, Press Association Business Reporter
Press Association: Finance
source: PA
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