𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

The UK economy could face a “very significant” hit from the conflict in Iran, the official budget watchdog has warned.

The Office for Budget Responsibility (OBR) said that the outlook for inflation would be “particularly uncertain” following spikes in gas and oil prices in recent days following attacks in the Middle East.

It came as the budget watchdog reduced its inflation forecast for this year, indicating that UK inflation will drop to target levels quicker than previously expected.

The OBR also cut its economic growth forecast for this year and revealed a worsening unemployment outlook for the next three years.

In its latest projections alongside the Chancellor’s spring statement, the organisation however highlighted that recent volatility in the Middle East could have an impact on a number of its projections.

The forecasts were prepared before days of recent attacks as part of an intensifying conflict between US-Israeli forces and Iran.

On Tuesday, the OBR said: “Conflict in the Middle East, which escalated as we were finalising this document, could have very significant impacts on the global and UK economies.”

David Miles, from the OBR’s budget responsibility committee, said its predictions that inflation will fall to target levels early this year have become more uncertain after jumps in oil and gas prices linked to recent attacks in the Middle East.

He said: “I think what will happen to inflation is particularly uncertain in the past few days.

“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.”

The trimmed-down inflation projections indicated that this will slow to 2.3% for 2026, down from a previous 2.5% forecast.

Experts said the lower-than-expected rate is partly down to “greater slack in the economy” and falling food and energy prices.

As a result, the OBR indicated that inflation will drop to the 2% target rate set by the Bank of England and the Government later this year.

The Bank has already suggested that inflation – the rate at which the price of goods and services rises – could fall below 2% by April.

The OBR said inflation is expected to remain at the 2% target from 2027 onwards, assuming this is not knocked off course by the potential jump in energy costs.

It came as the Chancellor Rachel Reeves told MPs in Parliament that the OBR said the UK economy would grow more slowly than previously expected in 2026, although growth will pick up in the following years.

UK gross domestic product (GDP) is expected to grow by 1.1% in 2026, as the OBR cut its previous prediction of 1.4% from last November.

The budget watchdog said the downgrade was linked to a growth slowdown late last year, loosening in the labour market and subdued data from recent business surveys.

However, it also lifted its forecasts for growth for both 2027 and 2028, with the economy to expand by 1.6% in both years.

The Chancellor said she had the “right economic plan” for the UK as she laid out her spring statement on Tuesday.

Ms Reeves also said that unemployment is “set to peak later this year” before reducing over the following years.

The OBR said that the UK unemployment rate is on track to peak at about 5.33% in 2026.

Latest data from the Office for National Statistics (ONS) showed that unemployment lifted to a five-year-high of 5.2% in the three months to December.

The OBR had previously predicted that the jobless rate would increase to 4.9% in 2026.

New forecasts show that unemployment is then on track to hit 4.9% in 2027 and 4.4% in 2028.

It had previously forecast it would be 4.6% in 2027 and 4.3% the following year.

The new forecasts have also reduced the Government’s borrowing projections for each year until 2031, in a potential boost for the Chancellor.

Reduced borrowing costs, linked to an easing in the yield on Government bonds, also meant that the Government’s headroom to meet its fiscal rules widened to £23.6 billion, compared with £21.7 billion in November’s budget.

Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said: “There were few major surprises in today’s spring statement, with the Chancellor delivering the well-flagged ‘boring budget’ that we and the market were expecting.”

He added: “Chunks of the fiscal forecasts now look dated because of the rapid escalation of events in the Middle East.”

Peter Arnold, EY UK chief economist, said: “The underlying improvement in the UK’s fiscal position was supported by higher actual and expected tax receipts, driven in large part by a stronger equity market performance since November.

“There may now be doubts around how long this stock market performance can be sustained if the conflict in the Middle East is prolonged and global equity market volatility continues.”