The ongoing conflict in Iran poses a serious threat to the UK economy, with the Office for Budget Responsibility (OBR) highlighting the potential for “very significant” repercussions. This warning comes as recent spikes in gas and oil prices create uncertainty around inflation forecasts, prompting concerns about economic growth and unemployment over the coming years.
Escalating Uncertainty in Inflation Forecasts
The OBR has stated that the outlook for inflation has become “particularly uncertain” due to the turmoil in the Middle East. Following a series of attacks, the volatility in oil and gas prices has raised questions about the trajectory of inflation in the UK. While the OBR had previously projected a quicker decline in inflation rates, these recent developments may complicate that outlook.
David Miles, a member of the OBR’s budget responsibility committee, expressed concern about the inflation predictions, noting that the central expectation had been for inflation to approach the Bank of England’s 2% target early this year. However, ongoing conflicts and market fluctuations are casting doubt on this forecast.
Revised Growth and Unemployment Projections
In conjunction with the Chancellor’s spring statement, the OBR revised its economic growth forecast down to 1.1% for 2026, a decrease from the previously anticipated 1.4%. This adjustment is attributed to a slowdown in growth observed late last year, a loosening labour market, and subdued business activity. Despite the downgrade for 2026, the OBR is optimistic about growth in subsequent years, projecting an expansion of 1.6% for both 2027 and 2028.
Unemployment forecasts have also shifted, with the OBR now expecting a peak rate of approximately 5.33% in 2026, a slight increase from earlier predictions. The latest statistics from the Office for National Statistics (ONS) revealed that unemployment reached a five-year high of 5.2% in the last quarter of 2025. However, a gradual decrease in unemployment is anticipated as the economy stabilises, with rates expected to fall to 4.9% in 2027 and 4.4% in 2028.
Fiscal Outlook and Borrowing Projections
The updated forecasts suggest a positive shift in the government’s fiscal position, with reduced borrowing projections extending to 2031. This is bolstered by a decrease in government bond yields, allowing more financial flexibility—headroom has widened to £23.6 billion from £21.7 billion since November.
Chancellor Rachel Reeves stated that the UK has a “right economic plan” in place, emphasising that while the economy is set to grow at a slower pace, the government remains committed to navigating these turbulent times.
Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, remarked that the spring statement delivered few surprises, characterising it as a “boring budget.” Yet, he acknowledged that the rapid escalation of events in the Middle East has made some of the fiscal forecasts appear outdated.
Concerns Over Market Stability
As the situation in Iran continues to unfold, experts are voicing concerns about the sustainability of current market trends. Peter Arnold, EY UK chief economist, noted that the underlying improvement in the UK’s fiscal outlook has been driven by higher-than-expected tax receipts, largely due to a strong equity market performance. However, he cautioned that prolonged conflict could undermine market stability and lead to increased volatility in global equity markets.
Why it Matters
The implications of the Iran conflict extend beyond immediate geopolitical concerns, potentially reshaping the economic landscape in the UK. With inflation forecasts in flux and growth projections downgraded, both consumers and businesses may face heightened uncertainty. The government’s ability to adapt to these challenges will be crucial in maintaining economic stability and public confidence in the years ahead. As the situation develops, the resilience of the UK economy will be put to the test, underscoring the interconnectedness of global events and national economic health.
