The Organisation for Economic Co-operation and Development (OECD) has cut its forecast for UK economic growth in 2026 to just 0.7%, down from a previous estimate of 1.2%. The downgrade is attributed to the ongoing US-Israel war with Iran, which has caused significant energy shortages and soaring oil and gas prices globally.
Key Takeaways
The OECD has downgraded its UK growth forecast to just 0.7% for 2026 due to the ongoing US-Israel war with Iran, which has caused global energy shortages and soaring oil prices. The conflict is already impacting Europe and the UK, with manufacturers facing sharp cost increases and stock markets tumbling. The ECB signals readiness to raise interest rates despite temporary inflation, while Morgan Stanley warns of potential recession for the UK by year-end.
The OECD's global growth forecast for 2026 remains unchanged at 2.9%, but inflation across G20 countries is now predicted to hit 4%/b>, up from the previous estimate of 2.8%. According to CNBC, only the US among G7 nations is expected to see higher inflation this year at a projected rate of 4.2%. The UK appears particularly vulnerable, with France, Germany and Italy expected to suffer more modest hits to growth of just 0.2 percentage points, compared to the UK's 0.5 percentage point cut. According to Sky News, higher energy prices are acting as a 'tax on British living standards' while potentially benefiting US growth.
The conflict is already having tangible effects in Europe and the UK. Eurozone private sector output sank to a 10-month low in March according to CNBC, with S&P Global's flash PMI falling from 51.9 in February to 50.5. In the UK, manufacturers are facing their sharpest cost increases since Black Wednesday in 1992 as reported by The Guardian and Sky News. Brent crude oil prices have risen almost 50% while gas prices increased over 90% since hostilities began on February 28.
The European Central Bank has signaled readiness to raise interest rates even if inflation proves temporary, with President Christine Lagarde warning that a 'not-too-persistent' rise could still trigger hikes due to communication risks. Meanwhile, Morgan Stanley warned high energy prices and rate increases might drag the UK into recession by year end.
The Dow Jones Industrial Average fell 1.7% on Friday, March 27, confirming a correction as traders worried about the global economic impact of the war in Iran according to Reuters. The blue-chip index is down 10% from its record high close on February 10, marking its worst decline since April 2025.
The Standard & Poor’s 500 index fell 1.7% on Friday, finishing off a fifth straight losing week, the longest such streak in nearly four years according to Los Angeles Times and HuffPost. The Nasdaq composite sank 2.4%, with all three major U.S. indexes closing at their lowest levels in over seven months.
President Trump extended a self-imposed deadline to 'obliterate' Iran’s power plants to April 6 if it doesn’t fully allow oil tankers to exit the Persian Gulf through the Strait of Hormuz according to Los Angeles Times and HuffPost. Secretary of State Marco Rubio said the U.S. could achieve its objectives in Iran without ground troops.
German Defence Minister Boris Pistorius described the conflict as an economic 'catastrophe' according to Al Jazeera, highlighting the global impact of the war. The OECD's downgrade for UK growth is attributed to higher inflation and dependence on international trade and fuel imports, with France, Germany, and Italy expected to suffer a more modest hit.
Moody's chief economist Mark Zandi warned that high oil prices have pushed the probability of a US recession above 50% according to Daily Mail. National Economic Council director Kevin Hassett claimed that even if the Iran war went on much longer, 'it wouldn’t really disrupt the US economy very much at all.'
ECB President Christine Lagarde said businesses may be quicker to raise prices in response to the oil shock from the Iran war according to Los Angeles Times. The Federal Reserve is now more likely to raise U.S. rates this year than cut them, while the European Central Bank and Bank of England are predicted to hike multiple times.
UK manufacturers experienced the sharpest one-month acceleration in costs since after Black Wednesday in 1992 according to The Guardian and Sky News. Morgan Stanley warned that high energy prices and interest rate hikes could drag the UK economy into a 'pronounced recession' by the end of 2024.
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