UK Economic Outlook Dims Due to Middle East Conflict
The UK is projected to face slower economic growth and increased inflation as a result of the ongoing war in the Middle East, according to forecasts from a prominent global policy organization.
This year, the UK is expected to record the second-highest inflation rate among the G7 advanced economies, reaching 4%, the Organisation of Economic Co-operation and Development (OECD) reported.
The OECD has revised down its economic forecasts for many of the world's largest economies, attributing the changes to the conflict involving the US, Israel, and Iran.
The organization cautioned that a prolonged war could lead to "significant energy shortages" worldwide. Additionally, sustained high fertiliser prices may reduce crop yields and cause food prices to surge in the following year.
The OECD's updated inflation forecast for the UK has increased from the 2.5% rate it predicted in its December report. It anticipates inflation will decline to 2.6% by 2027, which remains higher than the previous projection of 2.1%.
Economic growth in the UK is now expected to be 0.7% this year, a decrease from the earlier forecast of 1.2%. The growth forecast for 2027 remains unchanged.
Within the G7, only the United States is predicted to experience higher inflation than the UK, while Italy is expected to have weaker economic growth.
Globally, growth is forecast to slow to 2.9% this year before a slight increase to 3% in 2027. Inflation across G20 countries is projected at 4%, higher than previously anticipated, before falling back to 2.7% next year.
Energy Market and Policy Considerations
The OECD emphasized that its forecasts assume the current disruptions in energy markets will ease, with prices for oil, gas, and fertilisers declining from summer onwards.
It highlighted the importance of government interventions to mitigate the impact of rising energy costs on households, stating that such measures should be:
"timely, well-targeted on households most in need and viable firms, preserve incentives to lower energy use and have clear expiry mechanisms".
The organization also stressed the priority of policies aimed at improving domestic energy efficiency and reducing dependence on imported fossil fuels over the medium term.
Impact on UK Retail Sector
The economic forecast coincides with warnings from UK clothing retailer Next, which indicated it may need to increase prices for customers if the conflict in Iran continues.
Next reported strong overseas sales prior to the outbreak of the Middle East conflict but noted that ongoing instability could continue to limit 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 stated in its guidance for 2026.
The retailer anticipates incurring approximately £15 million in additional costs, including fuel and air freight, if the conflict persists for three months.
While these costs have been offset by savings in other areas, Next warned that if the war extends beyond three months, it will begin to pass these costs on to consumers through higher prices. However, the company emphasized that at present, this remains a contingency rather than a definitive plan.
