The UK economy faces headwinds from elevated global energy prices stemming from the US-Iran conflict, according to the latest projections from the Office for Budget Responsibility. While growth forecasts for the current year were raised, predictions for the following year were substantially reduced to 1% from the previous estimate of 1.6%, with recovery anticipated in subsequent years.
Inflation is anticipated to accelerate as higher energy costs ripple through supply chains and reach consumers, with projections showing prices rising at a 3.4% average rate next year before peaking at 3.8% in 2027. The surge in global oil prices has already affected fuel costs at the pump, with petrol averaging nearly £1.73 per litre and diesel close to £1.99. These elevated energy expenses are expected to drive price increases across various goods and services, particularly affecting transportation-dependent supply chains.
Living standards are forecast to contract next year as households’ purchasing power diminishes due to energy bills, with lower-income households disproportionately affected since energy represents a larger portion of their monthly budgets. Officials from the OBR described the outlook as a dim period in British economic history, noting virtually no real income growth for individuals since before the pandemic.
Interest rates are expected to rise to as high as 4.5% in coming years, up from the current 3.75%, making borrowing more expensive for households and businesses while increasing government debt servicing costs. Government borrowing is forecast to increase annually beyond previous projections, driven partly by higher welfare and pension spending due to inflation, though borrowing as a share of the economy is expected to decline over the next five years.
The OBR acknowledged considerable uncertainty in its forecasts given the volatile situation in the Middle East and its potential to reshape inflation expectations. US President Donald Trump has indicated the conflict may conclude following mid-term elections next month, which could materially alter economic projections.
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