As Chancellor Rachel Reeves prepares to unveil her spring economic forecast, she is met with the unsettling spectre of escalating tensions in the Middle East, which economists warn could undermine her efforts to combat inflation and stimulate growth. With a backdrop of soaring energy prices, the stakes are high as the independent Office for Budget Responsibility (OBR) is set to release projections that might reveal a more precarious financial landscape than previously anticipated.
Economic Outlook Challenged by Global Events
The ongoing conflict in the Middle East has resulted in a significant spike in energy prices, raising concerns about the potential impact on the UK economy. In light of these developments, Reeves is expected to emphasise the stability of her economic plan, asserting that her government has laid the groundwork for a robust recovery. However, the situation is complicated by the recent surge in benchmark European gas prices, which have risen by over 40%, alongside a 6% increase in Brent crude oil prices, as fears of supply disruptions loom large.
Mujtaba Rahman from the Eurasia Group highlighted the precarious position the government now finds itself in. “Just when Reeves thinks the economy is on a slightly more even keel, the government is now confronted with a crisis that’s completely outside its control,” he noted. The two focal points of her economic strategy—cost of living and interest rates—are now facing formidable challenges.
Projecting Stability Amid Uncertainty
In her address, Reeves will strive to present a narrative of stability and continuity, particularly in contrast to the tumultuous lead-up to last autumn’s budget. She plans to assert that her government’s earlier decisions have fortified the economy. “Because of the decisions we have already taken, we have a stronger and more secure economy. Inflation and interest rates are falling. And in every part of Britain, working people are better off,” she is expected to say.
However, the outlook is not without its sceptics. James Smith, chief economist at the Resolution Foundation, cautioned that the ongoing Gulf crisis could lead to a heightened inflation outlook and increased cost-of-living pressures. “It depends on how permanent it all turns out to be,” he remarked, emphasising the uncertainty that currently clouds the economic forecast.
Interest Rates and Consumer Spending at Risk
Before the escalation of the conflict, markets had been pricing in an 80% likelihood of an interest rate cut at the Bank of England’s forthcoming meeting on 19 March. However, this projection has diminished significantly, hovering just above 50% as of Monday afternoon. Reeves and her advisors were banking on these potential cuts to drive business investment and boost consumer spending.
Chris Beauchamp, chief market analyst at IG, drew parallels between the current spike in energy prices and the turmoil that followed Russia’s invasion of Ukraine. He warned that consumer spending could be severely affected if price pressures continue to mount, potentially derailing the plans for further rate cuts that the government had hoped for.
The Liberal Democrats have called upon Reeves to reconsider the planned increase in fuel duty scheduled for September, urging her to act in the interests of British families who may soon feel the pinch from rising fuel costs. Daisy Cooper MP, the party’s Treasury spokesperson, remarked, “With fuel prices poised to soar as a result of Trump’s war with Iran, it would be disastrous for Rachel Reeves to press ahead with a fuel duty hike in September. It’s the least she can do to help families weather the storm.”
A Fragile Economic Landscape
Since the autumn budget, the UK’s GDP growth has been lacklustre, registering a mere 0.1% increase in the final quarter of 2025. Yet, recent surveys from the business sector have suggested a somewhat more optimistic outlook. The OBR’s forecast will also reflect the recent decline in yields on UK government bonds, which has made borrowing cheaper for the Treasury—an advantage that now appears to be at risk due to the ongoing conflict.
On Monday, the bond market experienced a slight sell-off, resulting in a five basis point increase in 10-year yields, now sitting at 4.28%. As these economic indicators fluctuate, the government’s strategy for economic recovery is increasingly precarious.
Why it Matters
The implications of Reeves’s spring forecast extend far beyond numbers on a page; they reflect a wider struggle against the backdrop of global instability. As energy prices surge and inflation pressures mount, the government’s ability to navigate these challenges will not only affect economic recovery but also the everyday lives of citizens across Britain. With uncertainty reigning, the spring forecast serves as a critical test of Reeves’s leadership and the resilience of the UK economy in turbulent times.