The stuttering UK economy will stay stuck in the slow lane for the next 18 months as the world struggles to cope with the fallout from Donald Trump’s trade wars, Downing Street was warned today.
The Organisation of Economic Co-operation and Development (OECD), a club of wealthier countries, forecast in its latest update that the UK’s economy will grow by just 1.3% this year and 1% in 2026.
That represents a downgrade from previous forecasts of 1.4% and 1.2% and suggests that Keir Starmer and Rachel Reeves will have failed to reignite growth - a key Labour pledge - by the time the time they reach the halfway point to the next general election.
In its latest outlook report officials at the Paris based OECD said: “Adverse effects from heightened trade tensions and uncertainty on business sentiment and consumer confidence will significantly weigh on growth.
“The drag on external demand, private consumption, and business investment is projected to more than offset the positive effects of last autumn’s budgetary measures on government consumption and investment.”
The OECD report flagged particular concern about the state of the UK’s stretched public finances warning that the Chancellor’s “very thin” fiscal buffer provide minimal protection against future economic shocks.
The report said:”The state of the public finances is a significant downside risk to the outlook if the fiscal rules are to be met.
“Currently very thin fiscal buffers could be insufficient to provide adequate support without breaching the fiscal rules in the event of renewed adverse shocks.”
The report recommends that the Government should implements “ targeted spending cuts, including closing tax loopholes” alongside tax raising measures such as a shake up of council tax to reflect current property values.”
The OECD also urges ministers to crack on with the new National Planning Policy Framework “to unlock infrastructure projects and housing development.”
Globally growth is forecast to fall to 2.9% this year and next as the impact of higher US tariffs crash around the world economy. Global GDP has grown faster than 3% in every year since the pandemic.
Growth in the world’s biggest economy, the USA, will be worst hit, slumping from 2.8% last year to 1.6% this year and 1.5% in 2026.
President Trump has climbed down from some of his initial “Liberation Day” protectionist threats but the average US tariff rate is still on course to shoot up from 2.5% to 15%, the highest since the Second World War.
Kathleen Brooks, research director at investment platform XTB, said: The OECD slashed its growth forecast for global GDP growth to 2.9% this year and next, down from 3.1% and 3% respectively. “It blamed trade barriers, and tighter financial conditions for the downgrade.
“Its forecast for US growth was also slashed to 1.6% for this year, and 1.5% for 2026. This is down from its previous forecast of a 2.2% growth rate. The OECD said that weakness in the US, Canada and Mexico is to blame for the downgraded global growth forecast, with smaller downgrades for other countries.
The OECD’s inflation outlook may also spook investors. The OECD revised down its global inflation forecast to 3.6% from 3.8%. However, it revised its inflation forecast for the US to 3.2% for 2025, from 2.8% previously. The OECD also said that there is a risk of US inflation surging to 4% by the end of this year. Since President Trump wants the US to become a manufacturing powerhouse, could the US end up exporting inflation to the rest of the world?”
