The ongoing conflict in the Middle East and the Russia-Ukraine war have pushed up the cost of crude oil leading to higher fuel and energy costs, which in turn has driven up inflation around the world.
The ongoing price pressures helped push up the cost of borrowing for governments, contributing to an unexpected surge in government borrowing in August.
Finding extra money to cover higher interest payments on government debt is adding to the pressure on the Chancellor ahead of October’s Budget.
Prime Minister Andy Burnham has made easing the cost of living for households one of his key aims, while the government is under pressure to spend more on defence.
However, Burnham and Healey have pledged to stick to Labour’s manifesto commitments on tax and the government’s self-imposed fiscal rules.
The OECD said the war in the Middle East and climate-change related supply shocks presented risks to the global economy but emphasised that there was “considerable uncertainty” around its outlook.
The scale of the impact from higher fuel prices next year would depend on how long supply disruptions lasted, it said. Stockpiles of oil and supplies from outside the Gulf states had helped cushion the effects on economies so far, it said.
The OECD has lowered its global growth forecast for next near from 3.1% to 3%.
Growth prospects for Australia, Canada and the Euro-area were downgraded. However, the US forecast is now slightly higher.
As well as military conflicts, weather-related shocks, including from a strong El Nino, could hit farmers and help push up food prices, the OECD said.
In addition, tariffs and export restrictions on trade continue to add to uncertainty, it said.
Chief Secretary to the Treasury Emma Reynolds said: “Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience.”
She added that the government is “already giving families space to breathe” and “starting the big, long-term changes needed to create good jobs and growth in every postcode”.
However, Conservative shadow chancellor Andrew Griffith said the OECD urges countries to “control spending and improve public sector efficiency”.
“Instead, this government is trying to find new ways to tax you whilst having to pay interest rates on their borrowing which are the highest in the G7,” he said.
