UK forecast to face weaker growth and higher inflation from Iran war

The UK is forecast to experience weaker growth and higher inflation due to the impact of the war in the Middle East, according to an influential global policy group.

It means this year the UK is expected to have the second-highest inflation rate among the G7 group of advanced economies - at 4%, the Organisation of Economic Co-operation and Development (OECD) said.

The body has also downgraded forecasts for many of the worlds biggest economies due to the US-Israel war with Iran.

A prolonged conflict could trigger significant energy shortages globally, it warned, while if the sharp rise in fertiliser prices is sustained crop yields will be impacted and food prices will soar next year.

The OECDs new forecast for UK inflation is up from the rate of 2.5% it had predicted at its previous report in December.

It then forecasts inflation to drop to 2.6% in 2027 - still up from its previous projection of 2.1%.

Economic growth is now forecast to be 0.7% in the UK this year, down from 1.2% it had previously expected. Its forecast for 2027 is unchanged.

In early March the government‘s official forecaster, the Office for Budget Responsibility (OBR), cut its expected growth rate for 2026 to 1.1% from the 1.4% it predicted in last year’s Budget.

But this forecast was made before the Iran war, which the OBR said could have a very significant impact on economies.

Among G7 countries, only the US is predicted to have higher inflation than the UK in the OECDs forecast, while only Italy is expected to see weaker growth.

How high could UK petrol and diesel prices go?

Global growth is expected to fall to 2.9% this year before nudging up to 3% in 2027. And inflation across the G20 countries is predicted to be 4%, up from previously expected, dropping back to 2.7% next year.

The OECD said its predictions depend on the assumption that the current energy market disruption eases, with oil, gas and fertiliser prices falling from summer onwards.

It said measures from governments to cushion households from the impact of higher energy prices should be timely, well-targeted on households most in need and viable firms, preserve incentives to lower energy use and have clear expiry mechanisms.

Policies that improve domestic energy use and lower reliance on imported fossil fuels over the medium term were a priority, it added.

The forecast comes as UK clothing retailer Next warned it was likely to have to raise prices for customers if the Iran war persists.

It said overseas sales had been strong up to when the conflict in the Middle East broke out, and instability may continue to restrain growth in that region.

It is also likely to have knock-on effects on costs, selling prices and consumer demand in the rest of the business, Next said in guidance for 2026.

The retailer says it is likely to experience £15m in additional costs - such as fuel and air freight - if the conflict lasts for three months.

These have been offset by savings elsewhere, but if the war continues for longer than three months we will begin to pass costs through as higher pricing – but for today that remains a contingency not a plan.