OECD Raises UK Growth Forecast as Energy Support Measures Temper Inflation Outlook

The organisation now expects the UK economy to grow 1.1% in 2026, up from its previous forecast of 0.9%. It has, however, reduced its 2027 growth projection to 1.0% from 1.1%, reflecting the continuing impact of higher interest rates on economic activity.

The OECD also lowered its forecast for UK headline inflation. It expects prices to rise by an average of 3.1% in 2026, 0.6 percentage point below its previous projection, before inflation eases to 2.6% in 2027.

The revised assessment reflects stronger economic activity earlier in the year and the expected effect of newly announced government support measures. The OECD said the measures should help sustain consumer spending despite renewed pressure from international energy markets.

The outlook nevertheless remains sensitive to developments in the Middle East. Higher oil and gas prices can raise household energy bills and increase costs for transport, manufacturing and services, creating renewed inflation pressure even as underlying domestic demand moderates.

The differing growth and inflation projections also leave monetary policy in focus. The OECD expects UK interest rates to remain unchanged until late 2027, reflecting the challenge of bringing inflation back towards target while avoiding excessive pressure on economic activity.

For businesses, the combination of modest growth and elevated financing costs is likely to continue influencing investment decisions. Companies may remain cautious over expansion plans while monitoring consumer demand, wage settlements and borrowing conditions.

The labour market is another important variable. Slower wage growth could assist the disinflation process, while persistent services inflation could make it harder for policymakers to reduce borrowing costs.

The OECD's revised forecast provides a more resilient near-term picture for the UK economy, but the lower 2027 growth projection highlights the constraints created by higher rates and external energy shocks.

For policymakers and businesses, the central challenge will be maintaining domestic demand while preventing temporary energy pressures from becoming entrenched inflation that prolongs restrictive financial conditions.