The UK economy is bracing for a potential upheaval as the ongoing conflict in Iran raises concerns about inflation and growth, according to the latest report from the Office for Budget Responsibility (OBR). Recent spikes in energy prices have created a “particularly uncertain” outlook, prompting revisions to the nation’s economic forecasts just as the Chancellor presented her spring statement.
Inflation Outlook Shaken by Geopolitical Tensions
The OBR has signalled that the recent escalation of conflict in the Middle East could have “very significant impacts” on both the UK and global economies. This warning comes on the heels of a series of attacks that have driven up gas and oil prices, creating a ripple effect that complicates inflation forecasts. While the OBR had previously anticipated a swift return to the Bank of England’s inflation target of 2% by early this year, the recent volatility has introduced new risks to this outlook.
David Miles, a member of the OBR’s budget responsibility committee, stated, “Our central expectation had been that inflation would fall back towards the Bank of England’s 2% target early this year and will be around that level at the end of the year. There must be more uncertainty around that right now.” The OBR has adjusted its inflation projection for 2026 to 2.3%, down from 2.5%, indicating that while inflation is expected to decrease, the path forward is fraught with challenges.
Growth Forecasts Revised Downwards
Accompanying the inflation forecasts, the OBR has also lowered its predictions for economic growth. The UK’s GDP is now expected to grow by just 1.1% in 2026, down from the previously anticipated 1.4%. This downgrade reflects a slowdown in growth observed in the latter part of 2025, alongside softer labour market conditions and subdued business survey data.
However, there is a silver lining, with the OBR projecting a more robust recovery in subsequent years, forecasting GDP growth of 1.6% for both 2027 and 2028. Chancellor Rachel Reeves reiterated her confidence in the government’s economic strategy, asserting that the country will witness gradual improvements in growth rates as the geopolitical situation stabilises.
Unemployment Projections and Government Borrowing
In terms of employment, the OBR predicts that the unemployment rate will peak at approximately 5.33% later this year, a slight uptick from the current five-year high of 5.2%. This marks a significant revision from earlier forecasts, which had estimated a jobless rate of 4.9% for 2026. The new projections suggest a gradual decline in unemployment, reaching 4.4% by 2028.
Additionally, the report highlights an improvement in the government’s fiscal position, with borrowing projections for the coming years being reduced. This development offers the Chancellor greater flexibility in meeting fiscal targets, with the government’s headroom widening to £23.6 billion, up from £21.7 billion in the previous budget.
Market Reactions and Expert Insights
Analysts have responded to the spring statement with cautious optimism, noting that while the economic outlook remains clouded by external factors, there are elements of resilience within the UK economy. Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, remarked, “There were few major surprises in today’s spring statement… Chunks of the fiscal forecasts now look dated because of the rapid escalation of events in the Middle East.”
Peter Arnold, chief economist at EY UK, elaborated on the underlying improvements in the fiscal landscape, attributing them to stronger-than-expected tax receipts driven by a buoyant equity market. However, he warned that prolonged instability in the Middle East could jeopardise this positive momentum.
Why it Matters
The implications of the OBR’s latest forecasts are profound, signalling that the UK economy may be on the brink of significant turbulence. As geopolitical tensions continue to mount, the potential for rising energy costs and inflation may hinder recovery efforts, casting a shadow over growth prospects. Policymakers and businesses alike must remain vigilant, as the evolving situation in the Middle East could have far-reaching consequences for the UK’s economic landscape in the months to come.