UK facing biggest hit to growth from Iran war out of major economies

According to the Organisation of Economic Co-operation and Development (OECD), the UK is projected to endure the most significant slowdown in economic growth among the G20 major economies due to the ongoing conflict in Iran. This year, the UK's economic growth forecast has been reduced to 0.7%, a decline from the earlier estimate of 1.2%. In addition, inflation rates are anticipated to rise unexpectedly.

The OECD has revised its growth projections downwards for numerous large economies as a consequence of the war between the US and Israel and Iran. The organization has cautioned that a prolonged conflict could lead to "significant energy shortages" on a global scale. Additionally, if the recent surge in fertilizer prices continues, crop yields will be adversely affected, resulting in heightened food prices in the coming year.

While the OECD has maintained its global growth forecast for this year at 2.9%, it now expects inflation across G20 nations to reach 4%, a notable increase from the prior forecast of 2.8%. Specifically for the UK, the inflation forecast has been adjusted to 4% for 2026, up from an earlier estimate of 2.5%. By 2027, inflation is projected to decrease to 2.6%, although this is still an increase from the prior projection of 2.1%.

Among G7 nations, only the United States is predicted to experience higher inflation than the UK, and Italy is the only country expected to report weaker growth. Earlier in March, the UK's Office for Budget Responsibility (OBR), the official forecaster for the government, lowered its growth expectations for the UK in 2026 from 1.4% to 1.1%, a forecast made prior to the outbreak of the Iran conflict. The OBR noted that this conflict could inflict a "very significant" impact on global economies.

The OECD's forecasts operate under the assumption that current disruptions in the energy market will ease, leading to declines in oil, gas, and fertilizer prices from the summer onward. The organization emphasized that governmental actions to mitigate the impact of rising energy prices on households should be prompt, well-targeted towards those most in need and viable businesses, and must preserve incentives for reducing energy consumption, complete with clear expiration dates.

Moreover, the OECD stressed the necessity of policies aimed at enhancing domestic energy utilization and reducing dependency on imported fossil fuels in the medium term.

In light of these developments, UK clothing retailer Next has indicated that it may need to increase prices for consumers if the conflict in Iran continues. The company reported robust overseas sales prior to the escalation of conflict in the Middle East, but ongoing instability may likewise impede growth in that region.

Next indicated that the conflict could result in an additional £15 million in expenses related to fuel and air freight if the situation persists for three months. Although these costs have been somewhat mitigated by savings elsewhere, Next cautioned that prolonged conflict beyond three months would necessitate passing on these costs to consumers through higher prices. However, as of now, this remains a contingency rather than an established plan.