The conflict in the Middle East is set to have the greatest detrimental effect on the UK’s economy compared to other industrialised nations, the Organisation for Economic Cooperation and Development (OECD) analysis found, as inflation is set to rise.
In the first major assessment by a leading international think tank on the economic consequences of the Middle East conflict, sparked by the attack on Iran, the OECD found the UK’s growth rate will be 0.7% this year, compared to its last forecast, made in December, that the UK’s growth rate would be 1.2% in 2026.
To highlight the UK’s dependence on imports, the OECD found that the UK’s growth rate in 2026 would be downgraded because the country was likely to suffer from higher inflation than expected.
The 0.5 percentage point reduction in the UK’s growth rate is in stark contrast to the expected reduction in growth rate, expected to be only 0.2 percentage points, in France, Germany, and Italy, as they are less likely to be affected by the spiralling energy costs.
Noticing the weakening of the UK jobs market and the contraction of business investment towards the end of 2025, the OECD stated that the downgrade was due to the lack of momentum going into 2026 and the impact of the rising oil and gas prices due to the US-Israel attacks on Iran.
The shifting balance in the Middle East will be an important test of the strength of the world economy. The world economy will be completely unaffected by the rise in oil prices, especially if they start to ease in the summer.
Average global economic growth is still on track to rise to 2.9%, just as predicted in the last OECD outlook in December. The aftershocks will reduce the forecast for 2027 to 3% from 3.1%.
“The breadth and extent of the conflict are very uncertain, but a prolonged period of higher energy prices will contribute significantly to business sector costs and consumer price inflation, with negative implications for growth.”
Despite the fears over the cost to consumers in the US of President Trump’s war against Iran, the Paris-based organisation stated that the US was likely to expand at a faster rate than previously believed, driven by the ruling by the US Supreme Court that reduced import tariffs and the war against Iran, which boosted the demand for US oil.
The US is expected to expand by 2% in 2026, compared to the 1.7% growth forecast in December.
However, the global economy is in danger because of the uncertainty over the outcome of the war, the Paris-based organisation stated, and hence “there is a significant downside risk to the outlook from persistent disruptions to exports from the Middle East, which push energy prices even higher than previously expected and compound the problem of shortages of key commodities.”
It added, “Global growth has remained robust leading up to this conflict, with activity supported by strong levels of investment and production related to artificial intelligence (AI) technology in addition to the financial and fiscal environment.”
The United States and Israel’s attack on Iran took place just under four weeks ago, and the price of oil has steadily risen over time by an average of $60 per barrel since January to our current price of almost $100.
Prices have risen dramatically after Iran managed to stop the flow of oil through the Strait of Hormuz, which is responsible for about 20% of the world’s total oil production.
Like the United Kingdom, Turkey, Brazil, and Mexico, the USA is one of the most affected countries due to high fuel prices at the pumps, impacting disposable income for consumers and profits for businesses, even though the economy will be little affected.
However, the decision made by the US Supreme Court to reduce US tariffs and the US being a net exporter of oil and gas meant that the US economy will improve this year, with an increase to 2% compared to the previous forecast of 1.7% in December.
The main reason why the US economy might lose steam would be a decline in AI investments next year, the report said.
The US economy is forecasted to grow by 1.7% in 2027, down 0.2 percentage points from the previous forecast in December, while the UK and much of Europe are to experience a recovery.
According to officials of the OECD, the forecasts were made with the condition that the existing level of disruption in the energy marketplace will decrease over time, and that the prices for petroleum and natural gas, as well as fertiliser, will decrease steadily after the middle of the year 2026.
Moreover, it has been suggested that there are three upside possibilities for faster economic growth than projected: a strong business sector that is surprisingly strong; a resolution to the conflict in the Middle East sooner than anticipated, leading to lower energy prices; and/or an increase in investment in new artificial intelligence (AI) technology that results in increased levels of productivity gains across many industries.
“Because of the conflict in Iran, I will go even further to work to ensure a stronger and more secure economy,” stated Rachel Reeves.
The UK Chancellor: “The conflict taking place in the Middle East at present is not a conflict that we have caused. It is not a conflict that we have participated in. Nevertheless, it is a conflict that will have negative consequences for the United Kingdom.”
In response, the government is set to give more power to the mayors in the regions, promote the use of AI and innovation, and develop an even closer relationship with the EU to make the UK’s economy more resilient, she said.
The UK’s economic growth last year was 1.3%, compared with 0.9% in France and 0.4% in Germany, according to the OECD.
