The Organisation for Economic Co-operation and Development has lowered its projection for how much the UK economy will grow next year. The new estimate is just 1% for the full year, which is less than what had been expected. This drop in forecast comes as the country deals with economic effects from the ongoing conflict involving the US and Israel in Iran. The OECD noted that many nations are seeing their economic outlooks affected by the prolonged situation in the region.
The downgrade applies to 2027. The OECD previously expected the UK economy to grow by 1.1% next year.
However, the organization delivered better news about 2026. It raised its UK growth forecast for this year from 0.9% to 1.1%. The OECD cited solid domestic demand as one reason the economy has performed better than previously expected.
The prediction arrives as Chancellor John Healey prepares to present his first Budget at the end of October, according to the BBC. Healey and other government officials are trying to balance offering more help to households with following Labour’s campaign promises on taxes, according to a report from the BBC.
The forecast for future growth is also lower than what was previously expected for 2027. This is due in part to rising fuel prices, which are reducing overall economic activity.
The OECD said higher energy costs caused by disruptions to production and exports from the Middle East are expected to weigh on economic activity. Its projections assume oil and gas prices remain elevated through much of 2027.
The impact of these changes depends on how long supply chain problems continue.
The OECD said the global economy has so far handled the Middle East energy shock better than expected. Alternative supply routes, releases from strategic reserves and additional oil production outside the Gulf have helped limit the damage. Lower oil demand from China has also helped.
However, the organization warned that the course of the conflict remains uncertain. Continued disruptions could lead to shortages of energy and other products as reserves are depleted. European countries that import large amounts of energy are particularly exposed.
The OECD now expects the global economy to grow by 2.9% in 2026 and 3.0% in 2027. It also identified inflation and uncertainty as risks to the economic outlook.
Climate-related problems could add to those pressures. The OECD said severe weather could disrupt food production and push prices higher.
The UK is also dealing with pressure from government borrowing. Official figures released this week showed the government borrowed £18.3 billion in August. That was £3.5 billion more than the Office for Budget Responsibility had forecast. Borrowing since the start of the financial year reached £77.3 billion.
One critic said the government is trying to find new ways to raise taxes while also paying high interest rates on borrowed money. The interest rates the government must pay are among the highest in the G7 group of developed countries.
Debt interest payments have become an important issue ahead of the Budget. The OECD said in its earlier UK outlook that debt interest payments were running close to 3% of gross domestic product. It also projected that government debt would continue rising in the short term.
Higher inflation can make the problem worse because a portion of UK government debt is linked to inflation. Government debt interest payments reached £8.8 billion in August alone.
This makes it harder for the government to manage its budget and provide support to citizens.
The October 28 Budget will give the government an opportunity to set out how it plans to respond to the combination of slower projected growth, higher energy costs and increased borrowing pressures.
For now, the OECD's outlook presents a mixed picture. Britain's economy is expected to grow slightly faster this year than the organization previously predicted. But growth is expected to slow to 1% in 2027 as higher energy prices and global uncertainty weigh on the economy.