UK economy set for second lowest growth in G7 – OECD
The UK economy is set to suffer the second lowest growth and second highest level of inflation in the G7, the OECD has predicted, in a damning set of forecast revisions for the Labour government and the Bank of England.
Growth in the UK will slow to around 0.7 per cent, according to the OECD, which stands for Organisation for Economic Co-operation and Development.
It is the second lowest rate among G7 countries – ahead of just Italy – and far behind the three per cent growth rate for the G20.
The slowdown in the UK economy will add to scrutiny on the government after ministers hailed having the fastest growth of any European country in the G7 in 2025.
Inflation is also set to hit the UK economy more than other countries, shooting up to four per cent this year. OECD economists revised forecasts up for price growth this year by 1.5 percentage points.
The US is the only country that could suffer from higher inflation this year, with its predicted rate to be 4.2 per cent.
The Paris-based think tank’s revision exposes the UK economy’s vulnerability to disruptions brought by President Trump and Prime Minister Netanyahu, and the Iranian’s regime war in the Middle East.
The blocking of the Strait of Hormuz has led to spiralling oil and gas prices, which have risen by around 70 per cent since the start of the war, while analysts have suggested that higher borrowing costs and a heavy tax burden has dampened confidence among businesses and consumers.
UK economy ‘weakened’ by Reeves
The prospect of spiralling energy costs are set to unnerve households and firms, with elevated levels of price sensitivity likely to keep inflation higher in the medium term.
But interest rates will not be hiked beyond the Bank of England’s 3.75 per cent rate this year, in stark contrast to market predictions set by traders.
Chancellor Rachel Reeves emphasised the UK had not started or joined the war in the Middle East but admitted it would “have an impact on our country”.
“In an uncertain world we have the right economic plan,” Reeves said. “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.”
Shadow Chancellor Sir Mel Stride said the downgrade was a “damning verdict” on the Labour government.
“Rachel Reeves has ramped up borrowing, spending and taxes,” Stride said.
“As a result we have stagnant growth, while inflation, unemployment, the deficit and debt interest costs have all shot up. At the same time, Ed Miliband’s net zero obsession has left us reliant on imported energy instead of using our own supplies in the North Sea.
“Rachel Reeves can blame the world all she wants, but it’s her choices that have weakened our economy at the worst possible moment.”
OECD flags British vulnerabilities
OECD analysts also highlighted that the UK was “especially” affected by rising bond yields, which push up government borrowing costs.
The crumbling jobs market, and in particular falling numbers ofjob vacancies, was also flagged as a weakness particular to the UK.
The OECD projected growth to be 2.9 per cent across the world this year. The war is “testing the resilience” of the global economy while markets may be underestimating the damage the war will have on goods supplies, analysis suggested.
“Potential supply disruptions could be exacerbated by the current relatively low level of European gas reserves and the difficulties in exporting the vast majority of the world’s spare crude oil production capacity, which is primarily in Saudi Arabia,” the OECD’s latest report said.
“In addition to a further spike in prices, energy shortages could weigh on production activity in some economies, especially net energy importers.”