UK growth slows next year amid OECD forecast
The OECD has revised its outlook for the UK, forecasting a modest 1% growth for 2025 and a slowdown in 2026. Inflation is expected to remain above the Bank of England’s target for longer, driven by energy price volatility linked to Middle East tensions. The report highlights government support meas…
By Felo News Desk · Published
The Organisation for Economic Co‑operation and Development (OECD) has updated its economic outlook for the United Kingdom, signalling a slowdown in growth for 2025 and a modest rebound in 2026. The new forecast comes as the global body noted that the war in Iran has not dampened growth in many countries, but has pushed energy prices higher, creating inflationary pressure that is likely to persist into the next year.
2025 Growth Outlook
According to the OECD, the UK economy is projected to expand by 1.0% in 2025, a slight downgrade from the 1.1% growth that was previously expected. The revision reflects a more cautious view of global activity, as higher policy rates and energy price spikes are expected to weigh on consumption and investment across Europe. In contrast, the UK’s domestic demand has been described as "solid" in the second quarter, which helped lift the forecast from an earlier estimate of 0.9% growth.
Government measures aimed at easing household costs are also expected to support consumer spending. The removal of VAT on energy bills from October is one such initiative, designed to give households a breather as energy prices remain volatile. However, analysts note that the impact of these measures will be limited if inflation continues to run above the Bank of England’s 2% target.
Inflation Dynamics
Inflation in the UK is projected to hit 3.1% this year, down from the earlier forecast of 3.6%. While this is still the second‑fastest rise among G7 economies, it is a modest improvement driven by a temporary easing in energy prices during the summer, following a brief ceasefire in the Middle East. The Bank of England, however, expects inflation to climb to 3.75% by year‑end and peak around 4% in early 2027.
The OECD now expects inflation to slow to 2.6% in 2026, a shallower decline than the 2.4% forecasted in June. This adjustment reflects the organisation’s view that energy price volatility will continue to keep inflation above target for longer than previously thought. Across the G20, inflation is expected to average 3.6% in 2026, 0.5 percentage points higher than earlier predictions.
Policy and Market Reactions
Interest rates are likely to remain unchanged in the near term, according to the OECD, despite the higher inflation outlook for next year. The Bank of England has kept rates at a level higher than many other central banks, a move that economists anticipate will be maintained until the end of the year or the beginning of next year. The OECD’s secretary‑general, Mathias Cormann, warned that central banks must act if price pressures sharpen, while chief economist Stefano Scarpetta highlighted the importance of sustained investment and productivity growth to avoid global risks.
Treasury Minister Emma Reynolds praised the UK economy’s resilience amid Middle East and European tensions, noting that the country had the fastest growth in the G7 in the first half of the year. She also emphasized ongoing efforts to create good jobs and long‑term growth across all postcodes.
Conservative shadow chancellor Andrew Griffith criticised the OECD’s downgrade, arguing that the UK should aim for higher growth rates. Meanwhile, IMF chief Kristalina Georgieva urged major economies to curb borrowing and reduce debt levels, citing rising government borrowing costs and the highest gilt yields since the 2007 financial crisis.
What’s Next?
The OECD’s updated forecast signals a more cautious outlook for the UK economy, with growth expected to ease in 2025 and inflation projected to remain above target for an extended period. Policymakers will need to balance support for households with measures to keep inflation in check, while the Bank of England will likely keep rates steady until clear signs of price stability emerge. The coming months will reveal whether the UK can sustain its growth momentum amid global uncertainties and domestic fiscal pressures.
Key facts
- OECD forecasts 1% UK growth in 2025, down from 1.1%
- Inflation expected to rise to 3.1% this year, 2.6% in 2026
- Energy price volatility linked to Middle East conflict drives inflation
- Government VAT cut on energy bills aims to support households
- Bank of England likely to keep rates unchanged in the near term
Why it matters
The forecast shapes expectations for businesses, households, and policymakers, influencing investment decisions, consumer confidence, and monetary policy. Understanding the trajectory of growth and inflation helps stakeholders navigate the economic landscape amid global tensions.
Frequently asked questions
Why did the OECD downgrade UK growth for 2025?
The downgrade reflects concerns over higher policy rates and energy price spikes that are expected to dampen consumption and investment across Europe.
What measures are helping UK households with energy costs?
The UK government has announced a removal of VAT on household energy bills starting in October, providing temporary relief as energy prices remain volatile.
When might inflation fall back to the Bank of England’s target?
The OECD now projects inflation to slow to 2.6% in 2026, indicating a slower decline than previously expected.
Sources
- [1] standard.co.uk — originally reported as “UK growth to slow next year after stronger-than-expected 2026, says OECD”
