UK growth to slow next year after stronger-than-expected 2026, says OECD

UK economic growth is now expected to slow next year in a blow to Andy Burnham’s ambitions despite a stronger-than-expected performance in 2026 in the face of the Middle East conflict, according to new forecasts.

The Organisation for Economic Co-operation and Development (OECD) also reported that UK inflation will be below previous forecasts this year but will then take longer than expected to fall back to target levels.

It came as the global economic body said global growth was “resilient in many countries” during 2026 despite the impact of the war in Iran.

However, it also indicated that recent rises in energy prices linked to the prolonged conflict are likely to cause more inflation in the near term, before gradually easing next year.

In the UK, the economy is set to have grown by 1.1% for this current year, according to the fresh forecasts.

It represents an upgrade from a previous estimate of 0.9% growth from June, amid a boost from “solid” domestic demand in the second quarter of the year.

The report also indicated that consumers are likely to “be supported by newly announced government support measures”, such as the removal of VAT from household energy bills from October.

Nevertheless, growth is still expected to be weaker than the 1.4% reported last year and is then likely to dip slightly next year.

In June, the OECD had previously predicted economic growth of 1.1% but now said this is likely to be 1% as growth moderates globally.

It indicated that recent increases in energy prices and “higher policy rate” are likely to drag on activity across Europe.

Meanwhile, UK consumer price inflation is on track to hit 3.1% for this year, significantly lower than the previous prediction of 3.6% but still the second-fastest increase in the G7.

It comes after energy prices eased back over the summer amid the US-Iran ceasefire period, but these have swung notably higher after the ceasefire collapsed in July.

Inflation lifted to a five-month high of 3.1% last month, with the Bank of England predicting last week that this will lift to 3.75% by the end of this year and peak at around 4% in early 2027.

The OECD said it now expects inflation to slow to 2.6% next year, pointing to a shallower drop than previously expected, having forecast 2.4% in June.

It predicted that inflation across the G20 will hit around 3.6% next year, 0.5 percentage points ahead of its previous forecast.

The organisation indicated that interest rates “are expected to remain unchanged” in the UK in the near term, despite the upgrade in inflation predictions for next year.

The OECD highlighted that the Bank of England has kept interest rates at a higher level than many other economies.

Economists nevertheless widely expect the central bank to increase rates later this year or at the start of next year.

Mathias Cormann, secretary general of the OECD, stressed that central banks “must act if price pressures sharpen”.

The organisation’s chief economist Stefano Scarpetta highlighted that the AI boom is helping support global growth but said any “drop off” would be a “cause for concern”.

He added: “If investment slows, if productivity outcomes aren’t meeting expectations, then there are significant global risks.”

Treasury minister Emma Reynolds said: “Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience.

“We will face these challenges together and we are already giving families space to breathe. We had the fastest growth in the G7 in the first half of the year and we are starting the big, long-term changes needed to create good jobs and growth in every postcode.”

Conservative shadow chancellor Andrew Griffith said: “The OECD have downgraded the UK’s growth for 2027 to just a third of the average growth rate of the G20.

“We can and should aspire to do much better.

Separately, the head of International Monetary Fund (IMF) warned that leading world economies, such as the UK and US, need to cut borrowing and reduce debt levels.

It comes after weeks of increases in government borrowing costs, with the yield on UK gilts hitting the highest levels since the 2007 financial crisis.

Kristalina Georgieva told the BBC global economic shocks had been “pushing debt levels up like a staircase not to heaven” but that governments had taken “no action to contain that service cost”.