The UK is forecast to experience the largest impact on economic growth from the Iran war among G20 major economies, according to the Organisation for Economic Co-operation and Development (OECD).
The OECD has downgraded the UK's economic growth forecast for this year to 0.7%, down from its previous forecast of 1.2%. This downgrade is attributed to the ongoing US-Israel war with Iran, which has disrupted global energy supplies and led to higher inflation. As reported by the BBC, the OECD's forecast is based on the assumption that the current energy market disruption will ease, with oil, gas, and fertiliser prices falling from summer onwards.
The OECD warned that a prolonged conflict could trigger significant energy shortages globally, impacting crop yields and leading to higher food prices. Wholesale oil and gas prices have soared since the war started, due to disrupted supply from the effective closure of the Strait of Hormuz, one of the world's busiest oil shipping channels.
Impact on UK Economy
UK inflation is now forecast to hit 4% this year, up from the previous estimate of 2.5%. The OECD also forecasts that inflation will drop to 2.6% in 2027, still up from its previous projection of 2.1%.
Chancellor Rachel Reeves said the Iran war would affect the UK, but the government has the right economic plan in place. However, shadow chancellor Sir Mel Stride called the downgrade a damning verdict on the vulnerability of the UK economy, blaming the government's choices for weakening the economy.
Government Response
The UK government's official forecaster, the Office for Budget Responsibility (OBR), had previously cut its expected growth rate for the UK this year to 1.1% from the 1.4% it predicted in last year's Budget. Chancellor Rachel Reeves stated that the government plans to help those who need it most if energy bills spiral, but any package would be constrained by the government's borrowing rules.
The OECD emphasized the need for governments to implement measures to cushion households from the impact of higher energy prices, preserve incentives to lower energy use, and have clear expiry mechanisms. The organisation also stressed the importance of policies that improve domestic energy use and lower reliance on imported fossil fuels over the medium term.
Business Impact
UK retailer M&S's chief executive, Stuart Machin, stated that policy costs on the company's energy bill had skyrocketed in recent years and were unsustainable for businesses. Meanwhile, UK clothing retailer Next said it was likely to experience £15m in additional costs if the Iran war lasts for three months.
