UK facing biggest economic hit from Iran war of any major country

Britain faces a bigger economic downgrade as a result of war in the Persian Gulf than any other major country, according to the first comprehensive assessment of the implications of the conflict.

The Organisation for Economic Co-operation and Development (OECD) cut its 2026 forecast for UK gross domestic product by 0.5 percentage points, meaning Britain will have among the weakest economic growth in the developed world this year.

Its prediction for a 0.7% rise in output amounted to the worst downgrade among OECD member nations, with the euro area and South Korea following close behind.

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By contrast, the US will enjoy stronger growth this year as a result of the events of the past few weeks.

The divergence is largely explained by higher energy prices, which act as a tax on British living standards, since the UK is an energy importer, particularly sensitive to gas prices, while the US exports significant amounts of hydrocarbons.

The OECD said that it was downgrading its forecasts for growth widely following the sharp increase in the price of crude oil, alongside other key related products, from jet fuel and diesel to fertilisers which will weigh heavily on prices for consumers including those for food and other essential goods.

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‘Situation is very severe’: IEA chief on Middle East

The OECD interim forecast is the first major update for the global economy from a major international body since the onset of military activity in the Persian Gulf.

It said: “The breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth.”

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It pointed to the rise in tariffs imposed by the US in recent months as another source of uncertainty, dragging down global growth, and added: “A significant downside risk to the outlook is that persistent disruptions to exports from the Middle East that raise energy prices even further than assumed and aggravate shortages of key commodities, add to inflation and reduce growth.

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Chancellor on war contingency plans

“Such a scenario, or lower than expected returns from AI investment, could also trigger more extensive repricing in financial markets, weakening demand and raising financial stability risks.”

Financial markets have fully priced in two interest rate rises by the Bank of England this year, to combat the possibility of heightened oil and gas costs becoming widely engrained in the economy.

But the OECD believes, however, that the bank would hold off. It saw the current rate of 3.75% as restrictive enough, given the country’s existing labour market weakness.

It predicts inflation of 4% for the UK – up from the current annual rate of 3%.

Chancellor Rachel Reeves said of the report: “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.”