The Office for Budget Responsibility (OBR) has issued a stark warning regarding the potential ramifications of the escalating conflict in Iran, signifying that the UK economy could suffer a “very significant” impact. This comes as inflation forecasts are rendered particularly uncertain due to recent spikes in gas and oil prices, stemming from the ongoing strife in the Middle East.
Inflation Outlook Gloomy Amid Global Tensions
The OBR’s latest report, released in conjunction with the Chancellor’s spring statement, suggests that the outlook for inflation has become more precarious. Although the watchdog has lowered its inflation forecast for this year, predicting a decline to 2.3% for 2026—down from an earlier estimate of 2.5%—the recent turmoil in Iran has introduced new volatility. David Miles, a member of the OBR’s budget responsibility committee, remarked that the predictions for inflation, which had previously seemed stable, are now clouded by uncertainty following the recent escalation of conflict.
“The expectation for inflation to return to the Bank of England’s 2% target by early this year has been complicated by unforeseen rises in oil and gas prices,” Miles explained. This precarious situation highlights the interconnectedness of global events and their effects on the UK economy.
Slower Economic Growth Anticipated for 2026
In a broader context, the OBR has revised its economic growth forecast for the UK, projecting a more sluggish growth rate of 1.1% for 2026, down from its previous estimate of 1.4%. This adjustment is attributed to a slowdown in growth experienced late last year, combined with a loosening labour market and lacklustre business survey results.
Despite the downturn for 2026, the OBR expects growth to rebound, forecasting an increase of 1.6% for both 2027 and 2028. Chancellor Rachel Reeves, in her address to Parliament, underscored her commitment to a robust economic strategy, stating that while growth may be tempered in the short term, there are signs of recovery on the horizon.
Unemployment Rates Expected to Peak
The OBR’s analysis also indicates an upward revision of unemployment projections, forecasting a peak jobless rate of around 5.33% in 2026. This is a significant increase from the earlier prediction of 4.9%. Recent data from the Office for National Statistics revealed that unemployment has already risen to a five-year high of 5.2% in the three months leading to December.
The OBR anticipates a gradual decline in unemployment thereafter, projecting figures of 4.9% in 2027 and 4.4% in 2028. The revised forecasts suggest a more challenging labour market in the near term, as the effects of global instability ripple through the economy.
Fiscal Position Shows Slight Improvement
In a somewhat positive development, the OBR has adjusted its borrowing projections downwards for the years leading up to 2031, which could provide some fiscal breathing room for the government. The easing yields on government bonds have expanded the government’s headroom to meet its fiscal targets to £23.6 billion, compared to £21.7 billion in the previous budget.
Elliott Jordan-Doak, a senior economist at Pantheon Macroeconomics, noted that while there were no major surprises in the spring statement, it is evident that many of the fiscal forecasts may now feel outdated in light of the rapid developments occurring in the Middle East.
Why it Matters
The unfolding situation in Iran presents a multifaceted challenge for the UK economy, with potential repercussions for inflation, growth, and employment. As the conflict continues to evolve, the interconnected nature of global markets means that UK consumers and businesses alike may face increased uncertainty. With inflationary pressures rising and growth forecasts downgraded, the government’s economic policies will be under scrutiny as it navigates these turbulent times, making it crucial for policymakers to remain agile and responsive to the changing landscape.
