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A prominent international policy organization has identified the UK as the G20 nation most severely impacted in terms of economic growth by the war involving Iran. According to the Organisation for Economic Co-operation and Development (OECD), the UK’s economic expansion this year is now expected to be just 0.7%, a significant reduction from the earlier forecast of 1.2%. Alongside this downgrade, inflation rates are also projected to be higher than initially anticipated.
Globally, the OECD has revised down growth prospects for several leading economies, citing the ongoing US-Israel conflict with Iran as a primary factor. The organization has warned that if the conflict continues, it could cause widespread energy shortages, disrupt agricultural supply chains through sustained high fertiliser costs, and consequently drive food prices higher in the coming year. The surge in wholesale oil and gas prices is attributed to disruptions in supply caused by the near-shutdown of the Strait of Hormuz—a crucial oil transit route—and physical damage to energy infrastructure in the Middle East.
The consequences of prolonged high energy prices are expected to dampen economic growth, intensify inflationary pressures, and reduce the likelihood of interest rate reductions. While the OECD’s global growth forecast remains steady at 2.9% for 2024, inflation for G20 countries is now predicted to reach 4%, a sharp increase from the prior estimate of 2.8%. In the UK specifically, inflation is expected to reach 4% this year, rising from an earlier forecast of 2.5%, before easing to 2.6% in 2027, which is still above previous projections.
Within the G7 group, only the United States is anticipated to experience higher inflation than the UK, whereas Italy is forecasted to experience slower economic growth. The UK’s Office for Budget Responsibility (OBR) had previously lowered this year’s growth forecast to 1.1%, down from 1.4%, before the outbreak of the conflict. The OBR has noted the Iran war may have a “very significant” effect on the global economy. Chancellor Rachel Reeves acknowledged the war’s impact on the UK but emphasized confidence in the current economic plan, stating, “The decisions we have taken have put us in a better position to protect the country’s finances and family finances from global instability.” Meanwhile, opposition figures like shadow chancellor Sir Mel Stride criticized the government for economic vulnerabilities, attributing them to recent Labour leadership decisions.
The OECD’s outlook is dependent on the assumption that disruptions in energy markets will ease later in the year, with expectations for prices of oil, gas, and fertilisers to decline. It advised that government interventions to alleviate the burden of higher energy costs should be timely, targeted at the most vulnerable households and viable businesses, and designed to maintain incentives for energy conservation. Such policies should include clear expiry mechanisms, although they will inevitably be influenced by borrowing constraints and the aim to keep inflation and interest rates low. The OECD also emphasized that medium-term strategies must focus on improving domestic energy efficiency and reducing dependence on imported fossil fuels.
In light of these economic pressures, UK retailer Next has indicated it may raise prices if the Iran conflict persists. The company estimates it could face an additional £15 million in costs, including expenses related to fuel and air freight, if the war continues for three months. While these extra costs have so far been offset by savings elsewhere, Next warns that should the conflict extend beyond this period, passing on higher prices to consumers would become likely, though no concrete plans have been made at present
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