UK ECONOMIC GROWTH TO REMAIN BELOW 1% AS BUSINESS INVESTMENT STALLS, OECD WARNS

OECD: GOVERNMENT SPENDING TO DRIVE UK GROWTH AS PRIVATE SECTOR MOMENTUM FADES

The UK economy is expected to grow by less than one per cent this year as weak business investment, cautious consumer spending and a softening labour market continue to weigh on economic momentum, according to the latest forecast from the Organisation for Economic Co-operation and Development (OECD).

While the OECD has upgraded its UK growth forecast from 0.7% to 0.9% for 2026, the outlook still points to a sluggish expansion that remains heavily dependent on public sector spending rather than private sector activity.

The international economic body expects growth to improve modestly to 1.1% in 2027, but warned that inflationary pressures and labour market challenges continue to pose significant risks to the UK’s recovery.

Government Spending Driving Growth

The OECD’s latest projections suggest that public spending will remain the primary engine of economic growth over the coming year.

Public sector consumption is forecast to increase by 1.7%, significantly outpacing private consumption, which is expected to rise by just 0.4%.

At the same time, business investment is forecast to stagnate despite increasing by 4.3% last year.

The figures suggest that many firms remain reluctant to commit significant capital amid ongoing economic uncertainty, higher operating costs and a challenging global environment.

Businesses Prioritising Productivity

Industry leaders say many businesses are becoming increasingly cautious as they navigate rising costs and geopolitical instability.

Sachin Agrawal, Managing Director of Zoho UK, said: “UK businesses continue to battle sluggish growth, squeezed by cost pressures, geopolitical uncertainty and wage growth. The result is that business leaders are becoming more cautious, scrutinising spending and shifting priorities to productivity and ROI in order to tread water.”

The focus on efficiency is driving greater interest in technology investment, particularly in areas such as artificial intelligence and data-driven decision-making.

Agrawal said: “During economic difficulty, businesses demand more value from partners and every investment as they shore up their supply chains, customers and employees.

“Tech infrastructure plays a key role, particularly with data and AI, which is a driving force for enhanced productivity as businesses look to keep costs down.

“It’s important that business leaders focus on long-term resilience to weather the current storm, and future ones, building trust with customers in the face of wavering confidence. When the business community is thriving then economic growth often follows.”

Inflation Remains A Concern

The OECD also highlighted concerns around inflation, forecasting UK core inflation at 3.1%.

That places Britain alongside the United States as one of the highest inflation environments among G7 economies.

Persistently elevated inflation continues to put pressure on household finances while limiting the scope for interest rate reductions that could stimulate investment and spending.

The combination of slower wage growth and higher living costs is expected to constrain consumer activity throughout the year.

Labour Market Challenges Deepen

Perhaps the most concerning element of the OECD outlook is its forecast for unemployment.

The organisation expects the UK’s unemployment rate to rise to 5.5% during 2026, the highest level recorded in more than a decade.

The warning comes amid growing concerns over the availability of opportunities for younger workers entering the labour market.

Recent findings from the Alan Milburn review highlighted the economic impact of the UK’s growing population of young people not in education, employment or training (NEET), estimating the annual cost to the economy at £125 billion.

Graduate Hiring Slowdown Raises Concerns

Business leaders warn that reduced hiring activity could create longer-term talent shortages in key growth sectors.

Sheila Flavell CBE, Chief Operating Officer of FDM Group, said: “There is clearly a long-term talent crisis in the making as businesses scale back hiring, having significant knock-on effects on the wider UK economy.

“The challenge is particularly stark for graduates, who are applying for hundreds of entry-level roles with little to no response as demand has shifted towards mid and senior level hires.”

Flavell believes the labour market challenge extends beyond employment statistics and could have lasting consequences for innovation and productivity.

She said: “A strong jobs market is vital to sustainable economic growth and must be addressed by government, education and industry.

“It drives innovation and productivity while bringing through the next generation of graduate talent at the forefront of growing industries such as AI and data.

“These are the skills that will drive the UK’s competitive edge.”

Balancing Growth And Resilience

While the OECD’s revised forecast offers some encouragement compared with earlier projections, the overall picture remains one of caution rather than optimism.

With business investment expected to stall, inflation remaining elevated and unemployment rising, the UK’s economic recovery appears likely to remain gradual.

For businesses, the challenge will be balancing short-term cost pressures with long-term investment in technology, talent and productivity improvements capable of supporting sustainable growth in an increasingly competitive global economy.