The Organisation for Economic Co-operation and Development (OECD) has delivered a sobering prognosis for the British economy, forecasting that the UK will be saddled with the highest inflation rate in the G7 this year at 3.5%, a significant upward revision from its previous estimate of 3.1%. This persistent inflationary pressure is expected to remain a defining feature of the economic landscape, with the rate projected to stay well above the Bank of England’s 2% target at 2.7% in 2026, which would still be the second highest in the G7. The OECD attributes this stubborn inflation partly to resurgent food prices, which continue to exacerbate the nation’s cost-of-living crisis.
Concurrently, the UK is facing a significant growth slowdown. The OECD anticipates economic growth will decelerate sharply to 1% next year, down from a modest 1.4% in 2025. This anticipated slowdown is blamed on a “tighter fiscal stance” – signalling either higher taxes or reduced public spending – alongside increased trade costs and general uncertainty, factors expected to weigh heavily on both domestic and external demand. This puts Chancellor Rachel Reeves in a difficult position as she prepares November’s Budget, in which she is expected to raise taxes or cut spending to adhere to her self-imposed borrowing rules.
In response to the forecasts, Chancellor Reeves contended that the figures confirm the British economy is stronger than anticipated, having been the fastest-growing in the G7 during the first half of the year. While official data showed the economy grew by 0.7% in the first quarter and 0.3% in the second, the optimism is tempered by the looming challenges. These include not only domestic fiscal pressures but also the impact of Donald Trump’s trade tariffs, which have introduced new friction into global commerce. The OECD has warned that the full effects of these tariffs have yet to be felt globally, with growth expected to “soften noticeably” in the second half of the year as the initial surge of activity aimed at beating the tariffs unwinds.
While global growth has proven more resilient than expected in the first half of 2025, leading the OECD to upgrade its global forecast to 3.2%, this resilience is partly attributed to a temporary “front-loading” of trade activity by companies seeking to avoid the incoming US tariffs. The average tariff rate on imports to the US has hit 19.5%, the highest level since 1933, and the resulting dampening effect on investment and trade growth is expected to be a major headwind. In contrast to the UK’s inflation woes, the United States is projected to see inflation of 2.7% in 2025, despite its own protectionist measures.
