The Office for Budget Responsibility (OBR) has released an updated forecast for the UK economy, indicating a downward revision to growth in 2026, now estimated at a modest 1.1%.
This adjustment reflects a contraction in short-term economic momentum, highlighting concerns about the current pace of recovery.
In contrast, the medium-term growth outlook has seen a slight improvement, with forecasts for 2027 and 2028 both increased to 1.6%.
This positive adjustment suggests a potential stabilisation in economic performance over the next few years, albeit still below historic averages.
In terms of public finance, the OBR projects that public sector net borrowing will decline during the forecast period.
Currently projected to be 4.3% of GDP this year, it is anticipated to decrease to 1.8% by the fiscal year 2029-30. This reduction is a sign of improving fiscal health.
Still, officials emphasise that these projections are contingent on external factors and do not account for possible economic shocks—particularly those stemming from fluctuations in global energy prices.
The ongoing geopolitical tensions, particularly those linked to the escalating conflict involving Ukraine, Iran, and their regional partners, have introduced a layer of uncertainty. Financial markets have responded to these geopolitical risks; for instance, the FTSE 100 index, a key indicator of UK stock market performance, declined by approximately 2.6%. Additionally, UK 10-year gilt yields, which reflect government borrowing costs, hovered around an elevated 4.4%, indicating investor concerns about potential economic instability.
Furthermore, some concerns that rising energy costs may push inflation higher. Should this occur, it could complicate the monetary policy decisions that the Bank of England faces in the future, as policymakers seek to balance curbing inflation with supporting economic growth. Analysts have cautioned that if the conflict in the Middle East continues or escalates, energy import costs may rise sharply. This could weaken consumer spending as households cope with higher expenses, and it may also lead to sustained government borrowing as the state seeks to support households and businesses affected by these economic shocks.
Given these considerations, the OBR’s projections are viewed as highly sensitive to the developments in global geopolitics, underscoring the interconnectedness of political events and economic outcomes in the current landscape.
Susannah Streeter, Chief Investment Strategist, Wealth Club said: “The Chancellor was trying to project a ‘keep calm and carry on’ message, but market turmoil continued during her speech, with UK borrowing costs having shot up and London’s FTSE 100 deep in the red, staying around 2.6% lower.
“Although there was a nod to the current turbulence, the forecasts don’t take into account the rapidly developing situation in the Middle East. So even though Rachel Reeves championed forecasts of a further fall in inflation, there’s a clear and present danger of the price spiral taking off again due to escalating conflict with Iran.
“The Office for Budget Responsibility downgraded growth for this year to 1.1% but upgraded it slightly for the following years. This appeared to help sterling recover slightly against the dollar, but the moves were limited given that big risks have crept back into the outlook.
The potential wiggle room identified in the OBR’s latest projections also risks being swallowed up by the economic repercussions of war in the Middle East. Hopes for an interest rate cut later this month are being dramatically scaled back due to the spike in energy prices. It means servicing the UK’s debt pile could prove more costly than current forecasts suggest. Already high energy costs have been blamed for holding back growth, and the big worry is that if planned support for industries is not brought forward, more firms could go to the wall, potentially pushing the UK’s fragile recovery back into reverse.”
