UK Economy to Suffer Most from Middle East Conflict, Warns OECD

UK Economy Faces Disproportionate Impact from Middle East Conflict, OECD Warns

The UK economy is poised to suffer more damage from the escalating conflict in the Middle East than any other industrialized nation, according to a new analysis released today by the Organisation for Economic Cooperation and Development (OECD). The report, the first major assessment of the economic fallout from the attacks on Iran, significantly downgrades the UK’s growth prospects for 2026, citing rising inflation and a weakening economic foundation.

The OECD now projects the UK economy will grow by just 0.7% this year, a substantial reduction from its December forecast of 1.2%. This downward revision reflects the UK’s particular vulnerability to international trade disruptions and surging energy prices, exacerbated by the closure of the Strait of Hormuz – a critical shipping lane for global oil supplies. Oil prices have already doubled, climbing from an average of $60 a barrel in January to around $100 this week.

The impact on the UK is expected to be considerably greater than that felt by other major European economies. France, Germany, and Italy, which are comparatively more insulated from spiraling energy costs, are forecast to experience a more modest reduction in growth, estimated at just 0.2 percentage points. The OECD report points to a weakening UK jobs market and a contraction in business investment towards the end of 2025 as contributing factors to the downgraded forecast, indicating a lack of economic momentum entering 2026.

While the OECD anticipates average global growth of 2.9% – consistent with its December prediction – the conflict introduces significant downside risks. A prolonged period of elevated energy prices could substantially increase business costs and fuel consumer price inflation, further hindering economic expansion. The report also cautions that a failure of artificial intelligence investments to deliver expected productivity gains could exacerbate these challenges and trigger instability in financial markets.

Interestingly, the US economy is projected to fare better than previously anticipated, with growth now forecast at 2% for 2026, up from 1.7% in December. This improvement is attributed to a recent US Supreme Court ruling reducing import tariffs and increased demand for US oil resulting from the conflict. However, the OECD notes that the US, like the UK, Turkey, Brazil, and Mexico, will be among the nations most affected by rising fuel prices.

The OECD’s assessment comes as Chancellor Rachel Reeves acknowledges the potential impact of the Middle East conflict on the UK economy. Reeves stated that the government is preparing to address the challenges by empowering regional mayors, fostering innovation in artificial intelligence, and strengthening ties with the European Union to enhance economic resilience. “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,” she said.

The report emphasizes that these projections are contingent on a stabilization of energy markets, with oil, gas, and fertilizer prices expected to gradually decline from mid-2026. However, the OECD acknowledges that an earlier resolution to the conflict, or unexpectedly strong performance in the business sector or AI investment, could lead to more positive economic outcomes. The evolving situation demands close monitoring, particularly regarding the duration of the conflict and its impact on global energy supplies.

The UK’s economic growth in 2025 was 1.3%, according to the OECD, surpassing France’s 0.9% and Germany’s 0.4%. However, the current trajectory suggests a significant slowdown, highlighting the precariousness of the UK’s economic position in the face of geopolitical instability.