Rural areas in the UK would be particularly at risk of diesel shortages if the conflict in Iran continues to squeeze supplies, the Organisation for Economic Co-operation and Development has warned.
The OECD predicted economic growth of 0.9% in the UK this year – a modest upgrade from the 0.7% it feared in March when it last updated its forecasts. It said government spending will help to support the economy in the short term.
Next year’s UK growth forecast is weaker, however, at 1.1%, instead of the 1.3% expected previously.
Setting out in its latest economic outlook the particular risks to the UK from the conflict, which the OECD expects to crimp economic growth worldwide, it pointed to potential shortfalls for key energy products.
“Localised shortages of diesel could weigh on activity, especially in rural areas,” it suggested, while low stocks of jet fuel create risks for “high-value trade sectors, such as the pharmaceutical industry, and in tourism”.
The chancellor, Rachel Reeves, has already intervened to support rural consumers reliant on domestic heating oil, which has soared in price since the outbreak of the conflict.
In what appeared to be further evidence of concerns in government about potential supply shortages, ministers have come under fire for failing to implement planned sanctions on jet fuel refined from Russian crude oil.
The OECD warned that the UK also faceed a significant challenge from the increased fertiliser costs as a result of the conflict feeding through to higher food prices.
It expects inflation to average 3.7% in 2026, peaking in the third quarter of the year before falling back next year, but remaining above target, at 2.4%.
However, the OECD does not expect Bank of England policymakers to be forced to raise interest rates to tackle rising prices – with the slowdown in the jobs market limiting workers’ capacity to respond by bidding up their wages, causing inflation to become entrenched.
“The Bank of England is expected to look through the energy price shock in 2026, as the surge in imported inflation is expected to be transitory and the growing slack in the labour market moderates domestic price pressures,” it said.
Rather than rises in interest rates, it predicts a quarter point cut, to 3.5%. Despite financial market expectations of higher borrowing costs, the Bank of England’s governor, Andrew Bailey, has recently played down the need for urgent action.
“Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above-target inflation to provide some support for the real economy is an appropriate way to approach the trade-off,” he said last week.
Responding to the OECD release, Reeves said: “The conflict in the Middle East poses a significant challenge to the world economy. Despite this, the OECD now expects UK inflation to be lower and growth higher than previously thought.
“We have the right economic plan, and changing course would put that progress at risk, with families and businesses paying the price.”
