The ongoing tensions in Iran are poised to have a considerable effect on the UK economy, according to the Office for Budget Responsibility (OBR). With rising gas and oil prices following recent attacks in the Middle East, the OBR has flagged a particularly uncertain outlook for inflation. This comes alongside a revised forecast for slower growth and increased unemployment in the coming years.
Inflation Projections Under Pressure
The OBR has reported that volatility in the Middle East could disrupt its projections, especially concerning inflation. Initially forecasting a drop in inflation to the Bank of England’s target of 2% earlier this year, the OBR now acknowledges that this expectation has become less certain. David Miles from the OBR noted, “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.”
Despite this uncertainty, the OBR has slightly adjusted its inflation forecast, predicting a reduction to 2.3% for 2026, down from an earlier estimate of 2.5%. Experts attribute this downward revision to a combination of increased slack in the economy and reductions in food and energy prices. The Bank of England has indicated that inflation could dip below 2% as early as April, provided that energy prices do not surge unexpectedly.
Slower Economic Growth Ahead
In its latest spring statement, the OBR has tempered its growth expectations for the UK economy. The gross domestic product (GDP) is now projected to increase by just 1.1% in 2026, a decrease from the 1.4% growth predicted in November. The downgrade is linked to a slowdown in growth observed late last year, coupled with a softening labour market and lacklustre business survey data.
However, the OBR remains optimistic about the subsequent years, projecting a rebound with growth rates of 1.6% for both 2027 and 2028. Chancellor Rachel Reeves has asserted that the government is following the “right economic plan,” despite the pressures from the current geopolitical climate.
Unemployment Trends and Borrowing Projections
The OBR’s outlook on unemployment has also shifted. The unemployment rate is expected to peak at around 5.33% in 2026, a rise from the previous prediction of 4.9%. Recent data from the Office for National Statistics (ONS) indicated an uptick in unemployment, reaching a five-year high of 5.2% in the last quarter of 2025. The OBR anticipates a gradual decrease in unemployment thereafter, projecting it to fall to 4.9% in 2027 and 4.4% in 2028.
Conversely, the forecasts have shown an improvement in the government’s borrowing situation. The OBR has reduced its borrowing estimates through 2031, giving the Chancellor a fiscal cushion. This has increased the government’s headroom to meet its fiscal rules, now estimated at £23.6 billion compared to £21.7 billion in the previous budget.
The Broader Economic Landscape
Economists have noted that while the spring statement lacked major surprises, the rapid escalation of the conflict in the Middle East has rendered some fiscal forecasts obsolete. Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, described the Chancellor’s statement as a “boring budget,” while Peter Arnold, chief economist at EY UK, highlighted the underlying improvements in the UK’s fiscal position, driven largely by stronger tax receipts.
Why it Matters
The potential ramifications of the conflict in Iran extend beyond immediate oil price fluctuations; they could reshape the UK’s economic landscape for years to come. With inflation projections becoming increasingly volatile and growth expectations being moderated, businesses and consumers alike may need to navigate a more unpredictable economic environment. Understanding these changes is crucial for making informed financial decisions as the UK grapples with both domestic and international challenges.
