Sluggish growth, sticky inflation and rising debt leave government with difficult choices
The OECD’s latest Economic Outlook has issued a stark warning for the United Kingdom, forecasting a slowdown in growth from 1.4% in 2025 to just 0.9% in 2026, with only a modest recovery to 1.1% in 2027.
The report highlights the UK’s particular vulnerability to volatile energy markets and persistently weak productivity growth, which together are fuelling a damaging combination of sluggish growth and above-target inflation.
Inflation headache for Bank of England
Consumer prices are expected to rise from 3.4% in 2025 to 3.7% in 2026, remaining well above the Bank of England’s 2% target. The OECD predicts interest rates will remain at their current level until the first quarter of 2027.
Birmingham-based Joe Nellis, economic adviser at accountancy and advisory firm MHA and Emeritus Professor of economics, said the Bank of England faces an acutely uncomfortable position.
“Cut rates and policymakers risk letting inflation escalate out of control,” he said.
“Raise them and the economy risks being brought to a standstill.”
Households and businesses face prolonged pressure, with high borrowing costs, rising import prices and squeezed consumer spending all pointing to a continuing cost-of-living crisis.
Public finances are also deteriorating. UK debt is forecast to rise from 102.3% of GDP in 2025 to 105% by 2027, with the fiscal deficit remaining above 4% of GDP.
Nellis said the Chancellor’s fiscal rules now look set to be breached, adding: “The government faces a deeply uncomfortable choice between stealth taxation and cuts to public spending. Neither will be popular.”
