UK economic growth slows as tariff impacts linger over global markets restricting fiscal recovery

The UK is bracing for slower economic growth over the next two years, according to a forecast released by the Organisation for Economic Co-operation and Development (OECD). The economic outlook suggests that growth will drop from 1.3 per cent in 2025 to just 1 per cent in 2026, reflecting the ongoing impact of global trade tensions and restrictive domestic fiscal policies.

The OECD’s report highlights the damage caused by escalating US tariffs and a broader slowdown in global trade. Prolonged uncertainty stemming from tariffs on steel, aluminium, and automobiles is reducing both business and consumer confidence. This has particularly affected trade-dependent markets such as the UK, US, and Canada, where economic expansion is showing signs of stagnation.

UK inflation poses another challenge as the OECD forecasts rates will remain “sticky” throughout 2025. Despite a slowing economy, the high inflation levels may delay interest rate cuts by the Bank of England, limiting room for monetary stimulus. Experts anticipate inflation could take longer than expected to meet the central bank’s target, further weighing on economic activity.

The broader picture of slower growth spans across global markets. The OECD predicts global economic growth will fall from 3.1 per cent in 2024 to 2.9 per cent in both 2025 and 2026. With weakened trade and declining investment, this trend is poised to dampen incomes, restrict job creation, and strain the economic recovery in member states.

For the UK, uncertainty regarding tariff policies coupled with constrained government budgets is amplifying risks. The Treasury’s spending power remains limited by rising costs in healthcare, pensions, and defence, leaving the economy vulnerable to shocks. Fiscal headroom is too thin to respond to crises without breaching existing rules for deficit control, according to the OECD’s analysis.

Rachel Reeves, the UK Chancellor, faces increasing scrutiny ahead of the government’s imminent spending review. The OECD’s suggestions for restricting day-to-day expenditure while maintaining critical public investment may offer guidance, but the challenges remain steep. Reeves maintains that trade agreements with the EU, US, and India will alleviate pressures by spurring business investment and protecting jobs. However, the OECD remains cautious about long-term UK growth prospects given the global headwinds and fiscal constraints.

Economic analysts warn that prolonged tariff disputes and policy uncertainty could disrupt recovery efforts further. With consumer confidence in decline and retail sales showing volatility, the UK must navigate upcoming economic challenges with care to avoid deeper stagnation.