Iran war will spare no major economy, says OECD — but the UK is more vulnerable than others

While the impact of the war in Iran is sparing no major global economy, the U.K. is predicted to bear the greatest economic hit of any developed market nation, according to the Organisation for Economic Co-operation and Development (OECD).

In its latest economic report revising growth and inflation forecasts made in December, the OECD made steep revisions to the U.K.'s outlook.

It now predicts U.K. inflation to hit 4% this year — up 1.5 percentage points (pp) from its previous forecast — and for 2026 growth to languish at 0.5%, down 0.5pp from its last review.

The revisions were the steepest of any made by the Paris-based OECD regarding major global economies in its interim economic outlook published Thursday.

Out of the G7 group of industrialized economies, only the U.S. was predicted to see higher inflation this year, with the OECD predicting the rate to hit 4.2%.

The U.S. and Israel's war with Iran has already had a dramatic impact on the global economy, prompting central banks to lower growth forecasts and hike inflation expectations on the back of rising international oil and gas prices.

The OECD said Thursday that the conflict in the Middle East is testing the resilience of the global economy with the outlook "surrounded by high uncertainty."

Growth has been supported by strong momentum in technology-related investment and lower tariff rates than previously assumed, the OECD added, but Iran's block on most energy shipments through the Strait of Hormuz and damage to regional energy infrastructure has "generated a surge in energy prices and disrupted the global supply of energy and other important commodities, such as fertilisers."

"This is raising costs, weighing on demand and adding to inflationary pressures," the OECD noted.

The U.K. is more exposed to the global energy price shock than many other nations, as the country imports most of its oil and natural gas, and has limited gas storage facilities. The last inflation print published earlier this week, showing the consumer price index unchanged at 3% in February, is now expected to rise.

The lower growth outlook and higher inflation trajectory poses a problem for the Bank of England, which before the war began, had been expected to cut interest rates this spring, from their current level of 3.75%, in what would have been welcome relief for borrowers and businesses.

The war has put paid to expectations of an interest rate cut for now, however, with some economists saying hikes could be on the horizon if the war continues for longer than expected.

The OECD said central banks "need to remain vigilant and ensure that inflation expectations stay well anchored," adding that "monetary policy adjustments may be needed if price pressures broaden or if growth prospects weaken substantially."

The British government has announced it would help those hardest hit by the energy price rises, but Finance Minister Rachel Reeves insisted this week there would be no blanket measures to support households with their energy bills.

With financial markets eyeing the U.K.'s Labour government closely for signs of fiscal indiscipline, Reeves reiterated that her "fiscal rules" limiting government borrowing and lowering national debt were "ironclad" —and not about to be bent in response to the Iran war.