The OECD has warned that rising inflation, softer hiring conditions and the economic fallout from the conflict involving Iran could leave the UK facing a slower and more fragile recovery than many households were hoping for.
While the organisation slightly upgraded its growth forecast for this year, it also cut its outlook for 2027, signalling that the challenges weighing on consumers and businesses may linger far longer than expected.
The Paris-based economic body now expects the UK economy to grow by 0.9% in 2026, an improvement from the 0.7% forecast it issued in March. The upgrade largely reflects stronger-than-expected growth at the start of the year, including a 0.6% expansion in the first quarter. Yet beneath that improvement sits a far more cautious message. The OECD believes higher energy costs, weaker 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 crisis could prove temporary. The OECD expects inflation to rise to 3.7% this year as higher fuel and energy prices linked to the conflict filter through to households and businesses. That would leave many consumers once again facing the familiar challenge of rising bills eating into disposable income.
Higher energy costs are arriving at a difficult moment. Mortgage payments remain elevated for many borrowers, rents continue to climb in parts of the country and much of the extra savings built up during the pandemic have already been spent. Another rise in everyday costs could leave households with even less room to absorb unexpected expenses or maintain discretionary spending.
Employers are also expected to become more cautious about hiring. The OECD forecasts unemployment will rise to 5.5% this year before easing slightly to 5.3% next year. While those figures remain below levels seen during previous downturns, they suggest businesses are becoming more careful as growth slows and operating costs increase.
The effects often show up long before they appear in economic statistics. Faced with higher costs and uncertain demand, companies may delay expansion plans, hold back investment or leave vacant positions unfilled. Households often respond in a similar way, postponing larger purchases and focusing spending on essentials until their financial outlook feels more secure.
The OECD expects UK growth to slow from 1.4% last year to 0.9% this year. It also reduced its forecast for 2027 growth from 1.3% to 1.1%, reflecting concerns that disruption linked to the conflict could continue to affect global trade, energy markets and business sentiment well beyond the immediate crisis.
Those concerns are 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 persist well into 2027, world growth could weaken even further, potentially pushing some economies close to recession and increasing the risk of energy shortages in more vulnerable regions.
Investors and policymakers are once again confronting a problem many hoped had been left behind: slower growth alongside rising prices. The Bank of England is still expected to lower interest rates as underlying inflation eases, but fresh energy-driven cost increases could complicate that path. Policymakers are being 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 harder to ignore. The economy is still expanding, but many of the pressures that defined recent years have not disappeared.
A fresh rise in energy costs, slower hiring and continued instability overseas leave the recovery looking far less secure than it did only a few months ago. The OECD is not forecasting a crisis, but its latest outlook suggests that the financial strain many households thought was beginning to fade may prove harder to leave behind than hoped.
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