OBR: Iran conflict could have ‘very significant’ impact on UK economy
Here’s a grim chart from the OBR, showing how growth in GDP per person has been much weaker than if it had followed its rate before the financial crisis.
The OBR’s David Miles tells reporters:
Right now, the level of GDP per person in the UK is around about 30% below where it would have been had there not been a profoundly different trajectory for productivity in the period since the financial crisis.
It is not surprising on the back of that that the fiscal situation in the UK remains very challenging.
And of course, such forecasts could already be out of date due to the market turbulence this week.
As the OBR explain:
Conflict in the Middle East, which escalated as we were finalising this document, could have very significant impacts on the global and UK economies.
Key events
London stock market meltdown continues
Rachel Reeves has not managed to stem the losses on the London stock market today.
Rising alarm about the Middle East crisis has triggered a slump in stock prices, which is worsening through the afternoon.
The FTSE 100 index of blue-chip shares is now down a painful 3.7% at 10,417 points, its lowest level since 13 February, and a loss of 363 points.
Nearly each of the hundred stocks on the index are down, with British Airlines’ parent company IAG down 8% today, and mining stocks and banks also notably weaker.
The New Economics Foundation argue that the govenment may need to provide help with energy bills, if the UK suffers a price shock from surging oil and gas costs.
George Bangham, head of social policy at NEF, says:
“If the Iran war leads to an energy price shock in Britain, households and businesses won’t be able to afford the pain and the Treasury will have to step in to help.
“The government should immediately prioritise building a better crisis infrastructure for energy costs, that at the very least supports the most vulnerable households with big rises in energy bills.
“Ideally, the government should pass emergency legislation that lets it join together different databases across the Department for Work and Pensions, HMRC and Ofgem, so it can target support towards the households facing the highest bills and whose incomes most restrict their ability to pay them.
“In the medium term, this is all the more reason why we need to reduce our dependency on international fossil fuel markets.”
OBR: UK not facing a 1974-style hyper-inflation shock
The OBR are now fielding questions from reporters.
ITV’s Joel Hills asks: If energy prices stay at their current levels, when do they start to have a material impact on growth and living standards?
The OBR’s David Miles warns that higher energy prices will affect the economy over “different time horizons”.
The price of petrol and diesel might change in months, or even weeks.
But household bills would take longer to change, as they are regulated through the quarterly price cap.
Miles says there’s a ‘rule of thumb’ that a 10%, persistent, increase in energy costs would add between a quarter and a half of a percent on prices.
Spot prices for energy are up around 20% since the Iran war started, Miles adds, which implies a rise of between half a point and 1 percentage point on inflation.
But he insists we’re “not looking at hyper-inflation”,
This is not 1974 in the UK.
[UK inflation hit 17% in 1974, after the oil price shock].
The National Institute of Economic and Social Research also fear that the Middle East crisis could disrupt the UK’s fiscal outlook.
David Aikman, NIESR director, says:
“The improved borrowing position announced in today’s Spring Statement has been overshadowed by the Middle East crisis.
The market has repriced sharply since yesterday: 2-year gilt yields have risen from 3.5% to 3.9%, while Brent crude now stands at $80 a barrel, some 18% above the OBR’s forecast assumption.
This reflects a significantly reduced likelihood of a Bank of England Spring rate cut.
If the crisis persists, higher energy prices will feed through to inflation, increasing borrowing costs further, putting serious pressure on the fiscal outlook.”
IFS: UK public finances are vulnerable
Hats off to the Institute for Fiscal Studies, who have rattled out their initial reaction to the spring statement.
Helen Miller, director of the IFS, says what is newsworthy is not the change in the forecasts since November but the forecast itself.
The main fiscal story remains the same. The UK’s public finances are vulnerable. Debt is high, and set to only just stabilise as a fraction of GDP by the end of the decade. Borrowing also remains high.
The government plans to bring it down rather rapidly, from 4.3% of GDP in 2025–26, to 3.6% in 2026–27, and 1.8% by 2029–30, at which point all borrowing is intended to be for investment only and for debt to be stable.
The big question – which remains as central as ever after today’s statement – is whether those plans can be delivered.
OBR: Iran conflict could have ‘very significant’ impact on UK economy
Here’s a grim chart from the OBR, showing how growth in GDP per person has been much weaker than if it had followed its rate before the financial crisis.
The OBR’s David Miles tells reporters:
Right now, the level of GDP per person in the UK is around about 30% below where it would have been had there not been a profoundly different trajectory for productivity in the period since the financial crisis.
It is not surprising on the back of that that the fiscal situation in the UK remains very challenging.
And of course, such forecasts could already be out of date due to the market turbulence this week.
As the OBR explain:
Conflict in the Middle East, which escalated as we were finalising this document, could have very significant impacts on the global and UK economies.
The outlook for inflation is “particularly uncertain” given recent events, says the OBR’s David Miles.
He says that the OBR’s central forecast had been that inflation fell back to the UK’s 2% target this year, adding “there must be more uncertainty about that now”.
The Office for Budget Responsibility are holding a press conference now to discuss their new spring forecasts.
David Miles, who has been jointly leading the OBR since Richard Hughes resigned after its previous economic outlook was published early online, speaks first.
Miles says the military action in Iran and across the Middle East in recent days illustrate how quickly the economic environment can change.
He confirms that the OBR’s central forecast hasn’t been updated to reflect events in the last 48 hours, which he says llustrate how quickly the economic environment can change.
Miles points out that the surge in gilt yields this week take them back to their levels when the OBR was drawing up its forecasts.
One thing that hasn’t changed very much in the last few days, and indeed in the last several months, is that the “government faces a situation which is very challenging fiscally”, Miles points out, showing a chart showing the UK’s high borrowing and debt levels.
Today’s spring forecasts was “largely a non-event”, with no big fireworks, says Sanjay Raja, chief UK economist at Deutsche Bank:
First, you could just about count on one hand how many policy measures were delivered as part of the Spring Statement. After delivering 75 policy measures in the autumn, Chancellor Reeves stuck to her commitment to avoid any new major policy measures. In total, spending decisions taken in the Spring Statement were projected to add up to £6bn in borrowing by 2030/31*.
Second, the borrowing outlook is marginally better than in the autumn. Changes in receipts are expected to outperform changes in spending. As a result, borrowing is expected to track lower over every single year of the forecast horizon beyond 2026/27 (compared to the Autumn Budget), driven primarily by lower net debt interest payments and non-interest receipts. In even better news, public sector net debt is expected to be around £22bn lower per year across the OBR’s five-year forecast horizon.
Third, as expected, the Chancellor raised her fiscal headroom. On her primary headroom, the Chancellor raised her fiscal buffer to £23.6bn in 2029/30. On her secondary rule, the Chancellor’s headroom picked up to just over £27bn.
Fourth, the gilt remit – while lower this fiscal year and next, the gilt remit was a little higher than markets expected, with the contribution of T-bills cut and conservative assumptions used in estimating any financing adjustment from the current fiscal year. While the market may be disappointed today, we suspect further revisions next month will be supportive for gilts.
Finally, recent events will undoubtedly weigh on the economy and the fiscal outlook. Based on current market conditions, higher inflation and weaker spending would dominate near-term projections, leaving the Chancellor with £5bn less in headroom. Calls for support on energy prices will only increase from here, alongside calls to ramp up defence spending. Tight spending envelopes will also be called into question. While the Chancellor may have built up a little bit more of a buffer over the last two fiscal events, pressure to spend some of her fiscal space will likely come to a head in the Autumn Budget.
* – those spending decisions include the additional funding for special educational needs announced last month
Rachel Reeves isn’t getting any plaudits from the bond market today.
Normally, the news that borrowing is forecast to fall slightly faster than expected in November might have pushed down borrowing costs.
Instead, there’s a bonfire raging in the bond market today, as the Iran conflict and soaring energy prices are spooking investors.
UK bond prices are tumbling, pushing up the yield (interest rate) on 10-year gilts by almost 16 basis points (0.16 percentage points), a very sharp move.
Two-year gilt yields (which track interest rate expectations) are also up 16bps, to 3.79%.
Parts of the OBR’s latest Economic and fiscal outlook will make a reader nostalgic for the time before the Iran war broke out.
In the executive summary for today’s forecast, the watchdog says:
Market expectations for gas prices have fallen by 15 per cent on average over the forecast since November.
Market participants expect Bank Rate to fall from 3.75 per cent to 3.3 per cent by late 2026, which is marginally lower in the near term than in November. Bank Rate is then expected to rise to 4.0 per cent by the end of 2030.
UNFORTUNATELY, gas prices have pretty much doubled since the conflict broke out, while Bank Rate is only expected to drop to 3.5% by the end of this year.
Downgraded growth forecasts and rising unemployment rates ‘not a good headline for government’
Blick Rothenberg, the audit, tax and business advisory firm, says today’s downgraded growth forecasts and higher predicted unemployment rates are “not a good headline for government”
Simon Gleeson, a partner at the firm, said:
“Ultimately growth forecasts have been downgraded, and unemployment rates confirmed to continue to rise is not a good headline for any government.
The Chancellor chose to instead double-down on how her plan was right instead acknowledging it and talking to opportunities for growth.
[Reminder: growth this year is only expected to be 1.1%, down from 1.4% before, before a pick-up from 2027 – see earlier post].
Former chancellor Jeremy Hunt has told Reeves that her promise to cut £150 off energy bills in April will “ring hollow” with many people, given gas prices have surged this week.
Hunt also suggests that it is a mistake to have raised taxes by £66bn at the last two budgets. Couldn’t money for public services be raised by reducing the welfare bill instead?
Reeves pummels Hunt – accusing him of leaving a massive black hole in the public finances, adding it is “a bit rich” for the Conservatives to say we should bring welfare spending down when they presided over a huge increase in welfare spending.
Back in parliament, shadow chancellor Mel Stride has told the chancellor that she has delivered “a surrender statement” not a spring statement.
Stride accuses Rachel Reeves of turning up today “with no plan”, suggesting it may be a cunning way to avoid further u-turns.
And he compares the chancellor to a “dodgy estate agent” standing in a crumbling building without a roof, windows, or a floor, saying “just think of the potential”.
Not the worst line in the world – but cheeky, given the Conservatives were in charge of the house for 14 years before Reeves moved in…..
The Office for Budget Responsibility has also trimmed its inflation forecast this year – however, this was drawn up before the Iran war, so is already out of date.
The OBR now predicts CPI inflation will drop to 2.3% in 2026, down from the 2.5% it forecast in November.
The fiscal watchdog still expected inflation to run at 2% per year from 2027, as before.
It says:
A loosening labour market and falling energy and food price inflation contribute to inflation reaching its 2 per cent target in late 2026.
