Britain faces the biggest hit to growth from the Middle East conflict of all major global economies, according to an influential global policy group, which also warns inflation is set to surge to four per cent this year.
The Organisation of Economic Co-operation and Development (OECD) warned the conflict has worsened the outlook for many of the world's largest economies but the UK looks set to be hit particularly hard, with the 2026 growth forecast downgraded to 0.7 per cent from a previous estimate of 1.2 per cent – the largest cut of all major economies.
The UK is also on course to have the second-highest inflation in the G7, behind only the US, and the second lowest growth, behind Italy.
But despite the poor outlook, Downing Street has argued that the government’s plan for growth is working, insisting that “in an uncertain world we have the right economic plan”.
As well as oil and gas supply disruption caused by the Iran war, fertiliser shortages could send food prices soaring if the conflict is long-lasting, the OECD warned.
It is now expecting UK inflation to average 4 per cent in 2026, up from the 2.5 per cent forecast in its last report in December.
That will then decline to 2.6 per cent in 2027 - still higher than the previous projection of 2.1 per cent.
The OECD also downgraded its outlook for UK gross domestic product (GDP), predicting it will be 0.5 percentage points lower in 2026 than prior forecasts, at 0.7 per cent, before rising to an unchanged 1.3 per cent in 2027.
Across the G20 group of advanced nations - which includes countries like China, India and Saudi Arabia - economic growth is projected to weaken in the near term before gradually rising again through 2027.
But another “unexpected sharp increase in energy prices” could weaken growth even further from the OECD’s baseline prediction it warned, knocking a further 0.4 per cent off European growth this year and nearly 0.8 per cent next year, pushing some of Europe’s largest economies, such as the UK, closer to a potential recession.
While the OECD said there were a lot of uncertainties about the conflict in the Middle East, it warned longer-lasting closures to energy infrastructure and shipping could have much bigger consequences than currently expected.
A sustained spike in global energy prices will add significantly to business costs and raise inflation, which would weigh on growth, according to the report.
"A prolonged period of disruption could also result in the emergence of significant energy shortages that would lower growth further," the OECD said.
The OECD says governments should encourage homes and businesses to be more efficient with their energy use.
It also backed the chancellor Rachel Reeves’ plan to support households most in need.
But in the longer term, it argued that countries need to do more to reduce dependence on fossil fuel imports which make them vulnerable to geopolitical shocks.
Experts also said it was too early to say if the chancellor should ease her strict fiscal rules - which prevent her from borrowing to pay for day-to-day spending, and require debt to fall as a percentage of GDP by 2029/30 - in response to the crisis.
It referred to some Asian governments which have already taken steps to mitigate the risk of shortages, such as energy rationing for businesses in India and energy export restrictions in China.
Furthermore, the report warned over a sharp increase in fertiliser prices since the conflict escalated at the end of February, with regions in the Middle East big producers of things like urea and ammonia.
Supply shortages "could increase global food prices, with potentially serious impacts to household finances and inflation expectations", the OECD warned.
The organisation's economists said the world's central banks need to stay "vigilant" to keep inflation under control in response to the increased risks to global prices.
The shadow chancellor Sir Mel Stride accused the chancellor of making “choices that have weakened our economy at the worst possible moment.”
He said: “This downgrade from the OECD is a damning verdict on how vulnerable our economy is thanks to Labour. Rachel Reeves has ramped up borrowing, spending and taxes. As a result we have stagnant growth, while inflation, unemployment, the deficit and debt interest costs have all shot up. At the same time, Ed Miliband’s net zero obsession has left us reliant on imported energy instead of using our own supplies in the North Sea.”
Ms Reeves said: “The war in the Middle East is not one that we started, nor is it a war that we have joined. But it is a war that will have an impact on our country.
“In an uncertain world we have the right economic plan. The decisions we have taken have put us in a better position to protect the country’s finances and family finances from global instability.
“Our economic plan means going further to build a stronger more secure economy. That means going further on our three big choices: empowering regional growth, embracing AI and innovation, and establishing a closer relationship with the EU.”
Responding to the report, the prime minister’s official spokesperson said: “The war in the Middle East is not one that we started nor is it a war that we've joined, but it is a war that will have an impact on our country.
“In an uncertain world we have the right economic plan… our economic plan means going further to build a stronger more secure economy."
Asked whether the knock to the UK’s GDP is a result of a lack of economic planning, the spokesperson said: “I think most G7 countries have been downgraded in this forecast but we are building a stronger more secure economy through stability, investment and reform…
“Our economic plan means going further to build a stronger more secure economy and that is what we’re focused on despite global instability."
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