In today's Spring Statement, chancellor Rachel Reeves said the Office for Budget Responsibility (OBR) has “adjusted the profile of GDP”, with slower growth expected this year before accelerating in 2027 and 2028.
The OBR now forecasts GDP growth of 1.1% in 2026, down from the 1.4% rise forecast in November.
However, growth of 1.6% is then predicted in 2027 and 2028, up from the previous forecast of 1.5%.
Growth is expected to be 1.5% in 2029 and 2030, in line with previous predictions.
Reeves added that the OBR expects inflation to come down "even faster than it forecast in the Autumn".
However, accelerating conflict in West Asia has raised questions about global energy prices, inflation, and market volatility.
Markets now predict there’s just a 29% chance that the Bank of England will lower interest rates at its next meeting, down from 80% last week.
Swap rates and yields on two-year bonds have also surged, with economists now predicting that a rate cut is much less likely due to heightened chances of an inflation spike.
Andrew Sanford, partner at Blick Rothenberg, said: “One has to question, with such uncertainty, what value can be placed on the forecasts?
“Forecasted GDP increases are meagre before factoring in the current uncertainty in the Middle East. Inflation will increase, and GDP fall if the dispute in the Middle East continues.”
Susannah Streeter, chief investment strategist at Wealth Club, commented: “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.”
Emma Wall, chief investment strategist at Hargreaves Lansdown, agreed: “The Chancellor was keen to stress the higher growth, lower inflation outlook for the UK in today’s Spring Statement. But markets are listening less to what is happening in the House of Commons and more on the war in the Middle East.
"Expectations that higher oil prices will flow through to re-inflation have sent yields higher, and cooled expectations for interest rate cuts. The market is now struggling to price in even a quarter point cut from the Bank of England’s Monetary Policy Committee. We think this is overly pessimistic but understand the caution.
"There are echoes of the 1979 Iranian revolution, which not only caused a significant shift in geopolitics and re-configuration of cross-globe allies and partnerships, but also resulted in an oil crisis which saw the price of crude double over the course of a year, higher global inflation and slower economic growth.
"It will be this stagflation risk that equity and bond markets are most sensitive to, but the dynamics of the oil market have evolved significantly over the past 45 years. Crucially, while oil prices may be higher now, consensus is that this disruption is transitory – and so too will the impact be on wider asset classes. In the event of an effective transition of power – and end to the fighting – oil prices are expected to return to $65 a barrel within weeks, and therefore the likelihood of a global growth shock is minimal.”
