Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm

The OECD’s latest Economic Outlook issues a sobering warning for the United Kingdom. Economies across the globe are under pressure but the UK faces a set of acute challenges due to its vulnerability to volatile energy markets and persistently underwhelming productivity growth. As a result, the UK economy faces weaker growth, sticky inflation, and mounting pressure on public finances.

The OECD forecasts that the UK economy will slow from 1.4% in 2025 to 0.9% in 2026. It expects only a modest recovery to 1.1% in 2027. Inflation will remain above the Bank of England’s 2% target. Consumer prices are expected to rise from 3.4% in 2025 to 3.7% in 2026, then ease to 2.4% in 2027.

This puts the UK - especially the Bank of England - in an uncomfortable position. Normally, weaker growth leads to lower inflation and interest rates. But the OECD warns that global energy shocks, supply constraints, and geopolitical instability are pushing inflation back up.

This makes it no surprise that the Economic Outlook predicts that interest rates will stay at their current level until reduction in the first quarter of 2027 - cut and policymakers risk letting inflation escalate out of control, raise and the UK economy risks being brought to a standstill.

Households and businesses will feel the impact. Borrowing costs are likely to remain high for longer than expected. At the same time, higher import and energy costs will squeeze consumer spending and business margins. The cost-of-living crisis is set to continue for millions of households.

Government finances look troubling as well. The OECD expects UK public debt to rise from 102.3% of GDP in 2025 to 105% by 2027. The fiscal deficit is expected to remain above 4% of GDP. Slower growth, weaker tax receipts, and high debt costs leave little scope for government action.

The Chancellor’s fiscal rules are now on track to be breached, forcing her into action. This increases the likelihood that the Government will rely on stealth taxation and frozen tax thresholds, as well as reduced public spending. Another increase to the tax burden is unlikely to be popular with the country, while a reduction in public spending is unlikely to be popular with the Chancellor’s parliamentary party.

Overall, the OECD’s message is clear. The UK economy is entering a period of fragility and the Government has difficult decisions to make.