The OECD has warned that rising inflation, soft employment conditions and economic slowdown from the conflict involving Iran could leave the UK facing a slower and more fragile recovery than many households expected.
While the agency slightly improved its growth forecast for this year, it also lowered its outlook for 2027, indicating that tough challenges for consumers and businesses may last longer than expected.
The Paris-based economist now expects the UK economy to grow by 0.9% in 2026, an improvement from the 0.7% forecast it issued in March. This improvement reflects stronger growth than expected at the start of the year, including growth of 0.6% in the first quarter. Yet underneath that improvement sits a very cautious message. The OECD believes that higher energy costs, weak consumer demand and growing uncertainty are likely to slow momentum as the year progresses.
For many families, the concern is that the progress made against the cost of living problem may be short-lived. The OECD expects inflation to rise to 3.7% this year as higher fuel and energy prices are linked to a strain on households and businesses. That will leave many consumers once again facing the familiar challenge of mounting debt that eats away at disposable income.
High energy costs come at a critical time. Mortgage payments remain high for many borrowers, rents continue to rise in parts of the country and more more savings which were built during the plague have been destroyed. Some increases in everyday expenses can leave families with less room to meet unexpected expenses or end up spending discretionary money.
Employers are also expected to be more cautious about hiring. The OECD predicts that unemployment will rise to 5.5% this year before falling slightly to 5.3% next year. While those numbers remain below levels seen during previous recessions, they suggest businesses are becoming more cautious as growth slows and operating costs rise.
The results often appear long before they are seen economic statistics. Faced with higher costs and uncertain demand, companies may delay expansion plans, hold back investments or leave positions unfilled. Families tend to react the same way, putting off big purchases and focusing on spending on essentials until their financial situation feels more secure.
The OECD expects UK growth to slow from 1.4% last year to 0.9% this year. It also lowered its 2027 growth forecast from 1.3% to 1.1%, reflecting concerns that conflict-related disruptions could continue to affect global trade, energy markets and business sentiment beyond the current crisis.
That concern is not limited to Britain. The OECD expects global growth to slow from 3.4% in 2025 to 2.8% this year. It warned that if disruptions continue until 2027, global growth could weaken further, which could push some economies closer to recession and increase the risk of energy shortages in the most vulnerable regions.
Investors and policymakers are once again facing a problem many had hoped to leave behind: slow growth coupled with rising inflation. The Bank of England is still expected to cut interest rates as inflation lurks, but new energy-driven cost increases could complicate that approach. Policymakers are forced to balance support for economic growth against the risk that inflation remains stubbornly above target.
For businesses, investors and consumers, the latest forecasts reinforce a reality that is becoming hard to ignore. The economy is still growing, but many of them pressures described in recent years have not disappeared.
Fresh increases in energy costs, low hiring and continued volatility overseas leave the recovery looking more secure than it did a few months ago. The OECD is not predicting a crisis, but its latest outlook suggests that the financial difficulties many families are thought to be facing may be harder to overcome than expected.
