The UK economy is set for slower growth over the next two years, according to the OECD’s latest Economic Outlook, which forecasts a cooling in activity as budget tightening weighs on household spending and global uncertainty continues to affect trade.
GDP growth is projected to ease to 1.2% in 2026 before rising marginally to 1.3% in 2027 as financial conditions improve and business investment strengthens.
Inflation is expected to remain above the Bank of England’s 2% target across the forecast period.
Headline inflation is projected at 2.5% in 2026, easing to 2.1% in 2027, with renewed price pressures seen as temporary but persistent enough to keep inflation above target for a third consecutive year.
A softer labour market is expected to emerge as vacancies fall and employment declines. The unemployment rate is forecast to rise to 5.0% by 2027, reflecting the lagged effect of weaker demand and tighter fiscal policy.
The OECD expects the monetary policy stance to become neutral as the current rate-cutting cycle concludes.
Fiscal policy is set to remain restrictive, driven by high borrowing costs, sizeable budget deficits and rising public debt.
The organisation stresses that consolidation must be well-timed and balanced, using both revenue-raising measures and spending reductions to avoid undermining growth or allowing inflation to persist.
Alongside short-term fiscal decisions, the OECD highlights the need for continued structural reform to boost long-term growth.
This includes overhauling infrastructure planning, simplifying financial services regulation and pursuing supply-side policies to improve business certainty, reduce economic inactivity and encourage investment.
The findings build on the OECD’s September 2024 Economic Survey of the United Kingdom, which noted that fiscal consolidation, tax reform and stronger work incentives are essential to rebuilding resilience after the pandemic and energy crisis.
The earlier report also identified the need for clearer long-term plans to support decarbonisation of residential housing and accelerate progress towards net-zero commitments.
The UK remains a leading advanced economy in its trajectory towards net zero by 2050, but the OECD says faster action is required, particularly in sectors such as home heating where regulatory timelines, pricing signals and financial support will be crucial to stimulate the market for greener technologies.
