The UK economy is expected to grow at a much slower rate thanks to Trump’s trade wars, and rising global prices, according to a new report published by the OECD.
The OECD now expects the UK economy to grow by 1.3% in 2025 and just 1% in 2026, revised down from their March predictions of 1.4% in 2025 and 1.2% in 2026.
Falling growth forecasts come after the Paris-based organisation warned that Britain’s economic momentum “is weakening” as business sentiment is “rapidly deteriorating” and consumer confidence remains “depressed”.
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The strain coming from higher interest payments on government debt “will continue to weigh on the fiscal balance and push up public debt”, the OECD added.
Trump’s tariffs are also cited as a factor in the growth downgrade as the aggregate effective tariff faced by UK goods exported to the US is estimated to have increased by almost 8 percentage points since the start of the year.
These factors, the OECD says, will together “significantly weigh on growth”.
Despite the dismally small growth figures, the UK is expected to grow faster than some other major economies like France, Germany, and Japan.
The OECD also downgraded its overall expectations of the global economy, now expecting growth of 2.9% in 2025 and 2026 – this is the first time growth of lower than 3% is anticipated since the Covid-19 pandemic.
Rachel Reeves risks economic harm if her fiscal rules are kept in place, OECD says
The UK’s self-imposed fiscal rules have also come under fire, with the OECD saying chancellor Rachel Reeves' strict adherence to them poses a “significant downside risk” to the UK’s economic outlook.
The organisation warned the rigid fiscal rules create “very thin fiscal buffers” which could be “insufficient” if they are not broken to meet the potential needs of “renewed adverse shocks” to the economy.
The UK’s fiscal rules are that the current budget should be on course to be in balance or surplus by 2029/30, net financial debt should fall as a share of the economy in 2029/30, and that spending on social security and roughly half of welfare spending must remain below £194.5 billion by 2029/30.
Some economists and commentators have argued keeping the rules in place needlessly constrains public finances as they heavily limit the amount the government can borrow.
The Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, currently forecasts fiscal headroom of just £9.9 billion thanks to Reeves sticking to the fiscal rules.
To alleviate the stresses of the “thin fiscal buffers”, the OECD said the UK must "strengthen" the public finances “by delivering on the government’s ambitious fiscal plans, including through the upcoming spending review”.
It recommends a “balanced approach” to the public finances that should combine some spending cuts, the closing of tax loopholes, and the raising of some taxes.
Revenue-raising measures include “re‑evaluating council tax bands based on updated property values” and removing “distortions” in the tax system.
The OECD also called for the UK to boost investment and “revive” productivity growth, focussing on supply-side policy.
The Treasury will be alive to concerns around the lowered fiscal headroom when they announce the findings of the UK’s spending review, due to be published on 11 June.
The review will set the budgets of each government department for the next three years, but weak economic growth will make the lives of Treasury officials difficult as they try to find money without raising taxes.
On 28 May, the IMF suggested “refinements” could be made to the fiscal rules to avoid frequent spending cuts or tax rises, perhaps providing Reeves some political cover to change them in an upcoming fiscal event.
The chancellor previously described the fiscal rules as “ironclad”, and, during the election campaign, promised they would not be changed.
What is Rachel Reeves’s plan for growth?
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