The UK economy is bracing for a potentially severe impact from the ongoing conflict in Iran, as highlighted by the Office for Budget Responsibility (OBR). The watchdog’s latest analysis points to heightened uncertainty around inflation rates, primarily due to recent surges in gas and oil prices linked to the intensifying situation in the Middle East.
Inflation Forecasts in Flux
The OBR has revised its inflation projections, noting that the outlook is now “particularly uncertain” in light of the escalating conflict. While initial forecasts suggested a swifter return to the Bank of England’s target inflation rate of 2%, recent volatility in energy prices has prompted a reassessment. David Miles, a member of the OBR’s budget responsibility committee, remarked, “What will happen to inflation is particularly uncertain in the past few days.”
The OBR has adjusted its inflation forecast for 2026, now estimating it will ease to 2.3%, down from an earlier prediction of 2.5%. Analysts attribute this adjustment to a combination of reduced economic slack and declining food and energy prices, with expectations that inflation could approach the target level by later this year.
Growth Projections Downgraded
In conjunction with its inflation revisions, the OBR has downgraded its growth forecasts for the UK economy. The GDP is expected to grow by 1.1% in 2026, a decrease from the previously projected 1.4%. This downward revision reflects a slowdown in growth observed late last year, a loosening labour market, and subdued business sentiment. However, the OBR remains optimistic, predicting an increase in growth to 1.6% for both 2027 and 2028.
Chancellor Rachel Reeves addressed Parliament, indicating that while growth may slow initially, it is set to improve in the subsequent years. She asserted the necessity of a robust economic strategy to navigate these turbulent times.
Unemployment Trends
The job market is also facing challenges, with the OBR forecasting that unemployment will peak at approximately 5.33% in 2026. This projection is an upward revision from earlier estimates, which had anticipated a rate of 4.9%. Recent data from the Office for National Statistics (ONS) shows unemployment rising to a five-year high of 5.2% in the last quarter of 2025. The OBR expects unemployment to decrease to 4.9% in 2027 and further to 4.4% in 2028, indicating a gradual recovery in the job market over the next few years.
The Broader Economic Landscape
The OBR’s updated forecasts also suggest reduced government borrowing projections through to 2031, potentially giving the Chancellor more fiscal leeway. The easing of yields on government bonds has widened the government’s headroom to £23.6 billion, compared to £21.7 billion in the previous budget.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, noted that the Chancellor’s spring statement lacked major surprises, describing it as a “boring budget.” However, he cautioned that the rapid developments in the Middle East might render portions of these fiscal projections outdated. Meanwhile, Peter Arnold, EY UK’s chief economist, highlighted that the improvement in the UK’s fiscal position has been bolstered by better-than-expected tax receipts, largely driven by a resilient equity market since November.
Why it Matters
The unfolding situation in Iran poses not just a geopolitical threat but a tangible economic challenge for the UK. With inflation and growth projections under pressure, the resilience of the UK economy is being tested. As energy prices fluctuate and global markets react to the turmoil, the implications for consumers, businesses, and policymakers alike could be profound. The government’s ability to navigate these uncertainties will be crucial in maintaining economic stability and fostering recovery in the years to come.