UK growth will be weaker than previously expected this year and next, according to the OECD, as chancellor Rachel Reeves struggles to inject momentum into the economy.
The Paris-based body on Monday trimmed its UK GDP growth estimate for 2025 to 1.4 per cent, a 0.3 percentage point reduction from its previous calculation, following a disappointing recent economic performance.
The OECD added in its interim economic outlook that UK growth will slow to 1.2 per cent in 2026 after cutting its forecast for the year by 0.1 percentage point.
The downgrade comes ahead of Reeves’ high stakes Spring Statement on March 26, when official forecasts are expected to show a much weaker GDP outlook.
Countries across the world, including the UK, are also braced for mounting pressures from US President Donald Trump’s trade war.
The latest OECD forecasts factor in the 25 per cent tariffs imposed by Trump on imports from Canada and Mexico, his 20 percentage point levy increase on China, as well as US taxes on steel and aluminium that affect nations including the UK.
The US tariffs will drag on global activity, as well as add to trade costs and raise consumer goods prices, the OECD said.
The interim outlook downgraded output predictions for a dozen G20 countries, leaving the UK set to have the second-highest growth in the G7 in 2025 after the US.
But Reeves is searching for new sources of growth ahead of her Spring Statement after the UK economy unexpectedly contracted by 0.1 per cent in January, driven by weakness in manufacturing, according to official figures. Growth has largely stalled since May last year.
Reeves is set to receive a weaker growth forecast from the UK fiscal watchdog that will compound pressures on the public finances at a time when Britain and other European countries are accelerating efforts to boost defence spending given Trump’s wavering military commitment to the region.
The Office for Budget Responsibility is widely expected to say on March 26 that the headroom against Reeves’ key fiscal rule will be wiped out by higher borrowing costs and weaker growth, forcing her to pencil in fresh public spending cuts.
The OBR in October predicted UK GDP growth of 2 per cent in 2025 and 1.8 per cent in 2026, but forecasters at the IMF and Bank of England have been less optimistic.
OECD chief economist Álvaro Pereira called for action to keep UK borrowing contained, saying: “UK debt is fairly high, so it is time to make sure that the fiscal situation remains under control.”
In its interim outlook, the OECD said central banks around the world would need to remain “vigilant” given ongoing inflation pressures.
It forecast that UK inflation will decelerate to 2.9 per cent this year and then to 2.3 per cent in 2026, giving the BoE the chance to further cut interest rates.
The BoE is widely expected to keep rates unchanged when it meets on Thursday after it trimmed them by a quarter point to 4.5 per cent last month.
The consequences for global inflation from rising trade barriers will depend on the extent of further escalation, the OECD said.
“A one-off rise in the relative price of tradeable goods due to tariffs is likely to be accommodated, but a sequence of such changes, or signs that inflation expectations are rising amidst still-tight labour markets would likely require higher policy rates than would otherwise be the case,” it added.
Reeves earlier this month acknowledged a tougher UK economic outlook given the worsening global trade hostilities. “I don’t want to see tariffs increased,” Reeves said at an event hosted by Make UK, a lobby group for manufacturers.
On Monday she said: “This report shows the world is changing, and increased global headwinds such as trade uncertainty are being felt across the board.
“A changing world means Britain must change too, and we are delivering a new era of stability, security and renewal, to protect working people and keep our country safe.”
