Growth in the UK and around the world is likely to slow in 2025 and 2026 as US President Donald Trump's tariffs slam the brakes on the world economy, the Organisation for Economic Cooperation and Development (OECD) has warned.
The OECD urged the UK to pursue "fiscal prudence" as the country's growth was downgraded due to the impact of Trump’s trade war.
While UK growth strengthened in the first quarter, "momentum is weakening, with business sentiment rapidly deteriorating", the OECD Economic Outlook said, calling for Chancellor Rachel Reeves to cut spending, close tax loopholes and re-evaluate council tax bands.
UK GDP growth of 1.3% was forecast for 2025, down from 1.4% from March's preliminary forecast. GDP growth is seen slowing to 1.0% in 2026, down from 1.2%, "dampened by heightened trade tensions, tighter financial conditions, and elevated uncertainty".
Britain is one of a few countries seeing elevated inflationary pressures, which the OECD predicts will linger, as tariffs raise import prices and slow the disinflation process, but subside over 2026. CPI inflation was 3.5% in April and services price inflation was 5.4%.
The government's "substantial" debt interest payments are expected to weigh on the fiscal balance and push up public debt, while consumer confidence has declined and retail sales volumes have been volatile.
"Gilt yields have risen significantly in recent months, partly reflecting global developments," the report said.
"Adverse effects from heightened trade tensions and uncertainty on business sentiment and consumer confidence will significantly weigh on growth.
"The drag on external demand, private consumption, and business investment is projected to more than offset the positive effects of last autumn’s budgetary measures on government consumption and investment."
Britain's public finances are seen as "a significant downside risk to the outlook" under Chancellor Rachel Reeves's current fiscal rules, while elevated services price inflation another downside risk that could require the Bank of England from cutting interest rates further.
"Strengthening the public finances remains a priority, by delivering on the government’s ambitious fiscal plans, including through the upcoming spending review.
"A balanced approach should combine targeted spending cuts, including closing tax loopholes; revenue-raising measures such as re-evaluating council tax bands based on updated property values; and the removal of distortions in the tax system."
Global growth
Global GDP growth is expected to slow from 3.3% last year to 2.9% this year and in 2026, on the assumption that tariff rates as of mid-May are sustained despite recent legal challenges.
Its March outlook had forecast 3.1% global GDP growth in 2025, slowing to 3.0% in 2026.
"Substantial increases in barriers to trade, tighter financial conditions, weaker business and consumer confidence and heightened policy uncertainty will all have marked adverse effects on growth prospects if they persist," the report said.
"Higher trade costs, especially in countries raising tariffs, will also push up inflation, although their impact will be offset partially by weaker commodity prices."
US economic growth is expected to slow to 1.6% in 2025 and 1.5% in 2026, from the robust 2.8% recorded in 2024.
The OECD said the slowdown is due to the substantial increases in the US effective tariff rate on imports, and the impact of retaliation from some trading partners.