The conflict in the Middle East will damage the UK’s economy more than any other industrialised nation, according to analysis by the Organisation for Economic Cooperation and Development (OECD), which warned over rising inflation.

In the first major assessment by a leading international thinktank of the economic impact from the attack on Iran, the OECD said the UK economy would grow by just 0.7% this year, compared with its last forecast, made in December, of 1.2% for 2026.

Noting a weakening of the UK jobs market and a contraction in business investment towards the end of 2025, the OECD attributed the downgrade to a lack of momentum going into 2026 as well as the shock from rising oil and gas prices as a result of the US-Israel attacks on Iran.

Illustrating the UK’s dependence on international trade and imports of fuel, the OECD said it had downgraded the UK’s growth in 2026 because it was likely to suffer higher inflation than previously expected.

The forecast 0.5 percentage point cut in UK growth compares with expectations of a much more limited reduction in growth for France, Germany and Italy, which were more insulated from spiralling energy prices and are all expected to suffer a more modest hit to growth of 0.2 percentage points.

The OECD said the evolving conflict in the Middle East would test the resilience of the global economy, which it said would be unaffected by the spike in oil prices if they began to moderate in the summer.

Average global growth was still on track to be 2.9%, as predicted in the last OECD outlook in December. The aftershocks would cut a forecast for 2027 from 3.1% to 3%.

“The breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth,” it said.

Despite concerns over the cost to US consumers of Donald Trump’s war on Iran, the Paris-based organisation said the American economy was likely to grow at a faster rate than previously thought after a ruling by the US supreme court reduced import tariffs and the Iran conflict increased the demand for US oil.

The US is forecast to grow by 2% in 2026, up from the 1.7% forecast in December.

However, the global economy is in peril from the uncertainty surrounding the outcome of the war, it said, which means there is “a significant downside risk to the outlook [from] persistent disruptions to exports from the Middle East that raise energy prices even further than assumed and aggravate shortages of key commodities.

“Such a scenario, or lower than expected returns from artificial intelligence (AI) investment, could also trigger more extensive repricing in financial markets, weakening demand and raising financial stability risks,” it added.

The US and Israel began attacks on Iran almost four weeks ago, sending oil prices soaring from an average of about $60 a barrel in January to about $100 this week.

Prices climbed sharply after Iran effectively closed the strait of Hormuz – the crucial shipping chokepoint through which travels about 20% of the world’s oil production.

The OECD said that, prior to the conflict, “global growth remained resilient, with activity boosted by strong AI-related investment and production, and supportive financial and fiscal conditions”.

Like the UK, Turkey, Brazil and Mexico, the US will be among the worst hit by rising fuel prices at the pumps, hitting household incomes and business profits, though the broader economy will be largely unscathed.

But the decision by the US supreme court to cut US tariffs and Washington’s status as a net exporter of oil and gas meant the US economy would improve overall this year, expanding by 2%, up from 1.7% in the December forecast.

A decline in AI investments next year will be the main reason the US economy could lose momentum, the report said.

The US economy will grow by just 1.7% in 2027, down 0.2 percentage points on the December forecast, while the UK and much of Europe will stage a recovery.

Officials at the OECD said the projections were conditional “on a technical assumption that the current extent of energy market disruption moderates over time, with oil, gas and fertiliser prices declining gradually from mid-2026 onwards.

“On the upside, a surprisingly resilient business sector, an earlier-than-assumed resolution of the conflict in the Middle East that lowers energy prices, or broadening investment in artificial intelligence technologies that yields stronger productivity gains could push growth higher,” it added.

Rachel Reeves said the war in Iran meant she would need to go “further to build a stronger, more secure economy”.

The UK chancellor said: “The war in the Middle East is not one that we started, nor is it a war that we have joined. But it is a war that will have an impact on our country.”

In response, the government plans to hand more powers to regional mayors, embrace AI and innovation, and establish a closer relationship with the EU to make the UK economy more resilient, she said.

Economic growth in the UK last year was 1.3%, according to the OECD, compared with 0.9% in France and 0.4% in Germany.