The Organisation for Economic Co-operation and Development (OECD) has delivered a sobering update on the United Kingdom’s economic outlook, significantly lowering its growth forecast for 2025 and 2026.
In its latest reports, the OECD cites escalating trade tensions, heightened policy uncertainty, and mounting fiscal pressures as key factors undermining the UK’s economic prospects.
The UK economy has been navigating a complex landscape since the aftermath of Brexit, the COVID-19 pandemic, and subsequent inflationary pressures.
While the country saw some recovery in 2024, with global growth remaining resilient as reported by the OECD, recent indicators point to a slowdown.
Details of the revised UK growth forecast
According to the OECD’s latest analysis released in early June 2025, the UK’s economic growth is expected to slump to just 1% in 2026, a sharp downgrade from previous projections.
This follows a year of already subdued growth in 2025, impacted by a combination of domestic fiscal constraints and external trade barriers.
The OECD highlights that the UK’s public finances are in a precarious state, with high interest payments on government debt and limited financial buffers to absorb further shocks.
OECD is warning of a ‘very thin’ fiscal margin, leaving little room for error.
Trade tensions, particularly stemming from increased barriers and tariffs globally, are another critical factor.
The OECD notes that substantial increases in trade restrictions—exacerbated by policies in major economies like the United States—could have a marked adverse effect on the UK’s export-driven sectors.
As a nation heavily reliant on international trade, the UK is particularly vulnerable to disruptions caused by policy uncertainty and rising costs associated with new tariffs.
Implications of trade tensions on the UK
The intensification of global trade barriers poses a direct threat to the UK’s economic stability.
The OECD’s June 2025 report warns that if current tariff rates persist or escalate, they will dampen growth prospects not only in the UK but across the global economy.
For the UK, this is compounded by post-Brexit trade arrangements that have already introduced friction with the European Union, its largest trading partner.
Higher trade costs are likely to fuel inflationary pressures, which could force the Bank of England to maintain or tighten monetary policy, further stifling growth.
Businesses in the UK are already feeling the strain, with falling confidence reported amid uncertainty over future trade policies.
The OECD cautions that without international cooperation to reduce barriers, the UK could face a prolonged period of economic stagnation, impacting jobs, investment, and consumer spending.
Fiscal pressures and policy challenges
Domestically, the UK government faces what the OECD describes as a ‘horrible fiscal bind.’
High levels of public debt and rising interest payments limit the government’s ability to stimulate the economy through spending or tax cuts.
In fact, the OECD has suggested that measures such as raising council tax or closing tax loopholes may be necessary to shore up revenue, a recommendation that has sparked debate among policymakers and the public.
This poses political challenges for Chancellor Rachel Reeves, who must balance fiscal rules with public expectations.
The OECD also warns that without a credible fiscal path to ensure debt sustainability, the UK risks further economic instability.
This could include potential downgrades in credit ratings or increased borrowing costs, both of which would exacerbate the current slowdown.
The combination of fiscal constraints and external trade pressures leaves the government with limited options to address immediate economic weaknesses.
Broader global context and risks
The UK’s challenges are not occurring in isolation. The OECD’s global outlook highlights a weakening economic environment, with risks including geopolitical tensions and potential disruptions in financial markets.
For the UK, these global uncertainties add another layer of complexity, as any sharp slowdown in major economies like the US or China could further impact demand for British goods and services.
Inflation, while easing in some regions, remains a concern, and trade-related cost increases could delay a return to target levels in the UK.
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