Britain’s economic expansion is expected to lose momentum next year, with the OECD forecasting growth of 1.0% in 2027 after a more modest 1.1% in 2026.
The outlook, published ahead of the government’s October Budget, adds pressure to Andy Burnham’s fiscal plans as Chancellor John Healey seeks funding for Labour’s pledges and defence spending. Persistent energy costs and a weaker global outlook are also expected to keep inflation above target for longer.
A modest rebound, not a robust recovery
The OECD’s latest projection represents an improvement on its June estimate that the UK economy would grow by 0.9% this year. That forecast was lifted after stronger domestic demand helped support activity during the second quarter.
Even so, the expected 1.1% expansion in 2026 would remain well below the 1.4% recorded last year. Growth of 1.0% next year would indicate that the economy is stabilising rather than entering a sustained upswing.
The international body cited rising energy prices and higher interest rates as factors likely to restrain activity across Europe. It also lowered its forecast for global growth in 2027 to 3.0%, down from the 3.1% it anticipated in June.
The conflict in Iran has further complicated the outlook. Energy markets eased during the summer ceasefire, only to move sharply higher again after that truce collapsed in July.
Inflation could peak before it retreats
The OECD now expects UK consumer price inflation to average 3.1% this year, considerably below its previous forecast of 3.6%. That would nevertheless make Britain’s inflation rate the second-highest among G7 economies.
Prices rose to 3.1% in August, reaching their fastest annual pace in five months. The Bank of England last week predicted inflation would climb to 3.75% by the end of the year and reach approximately 4% in early 2027.
The OECD expects inflation to fall to 2.6% next year. That is lower than today’s rate, but a slower return to target than the 2.4% it projected in June.
Across the G20, inflation is forecast to average around 3.6% next year, 0.5 percentage points higher than the organisation previously expected.
The distinction matters. A falling annual rate would not necessarily mean living costs were easing for households, particularly if energy and other essentials remained expensive.
Budget decisions face tighter scrutiny
The forecasts arrive just before Healey presents his first crucial Budget. He must identify resources for Burnham’s policy commitments while also meeting rising defence requirements, with little comfort provided by the OECD’s subdued growth projections.
Government support is expected to offer some relief to consumers. The removal of VAT from household energy bills from October should reduce pressure on domestic spending, while the OECD said households would also benefit from other measures already announced by the government.
Treasury minister Emma Reynolds defended the economic record, arguing that the outlook did not reflect underlying weakness. She said the UK had delivered the fastest growth in the G7 during the first half of the year and was beginning the structural changes needed to create better employment and wider prosperity.
“We will face these challenges together and we are already giving families space to breathe,” Reynolds said. “We had the fastest growth in the G7 in the first half of the year and we are starting the big, long-term changes needed to create good jobs and growth in every postcode.”
The government’s argument will be tested by the gap between headline growth and the experience of households. If energy prices remain elevated and borrowing costs stay restrictive, economic growth may struggle to translate into stronger wages, lower prices or improved public finances.
Why it Matters
The OECD’s forecast leaves Healey with less room for error. Slower growth means tax revenues may rise less quickly, while persistent inflation could constrain interest-rate cuts and intensify pressure on household budgets. Every new commitment in the Budget will therefore face sharper questions over its cost, timing and economic justification at a moment when both growth and inflation forecasts point in difficult directions.
