The UK economy is bracing for significant challenges due to the ongoing US-Iran war, despite having no direct involvement in the conflict. The Office for Budget Responsibility (OBR) warns that soaring energy prices will slow growth, push up inflation, and leave living standards in a "grim" state. Chancellor John Healey acknowledged the "real challenges ahead" and introduced policies to provide temporary relief for households.
The OBR's first assessment since the Middle East conflict began highlights rising energy prices as the primary risk to the economy. While growth forecasts for this year have been raised, predictions for next year have been slashed from 1.6% to 1%. Inflation is expected to peak at 3.8% in 2027, driven by higher energy bills and supply chain disruptions. Petrol prices have surged to nearly £1.73 per litre, and diesel is close to £1.99, impacting transportation costs and consumer prices.
Living standards are set to decline next year, particularly for lower-income households, as energy costs consume a larger portion of their budgets. Real household disposable income is forecast to grow from 2027 but at a slower pace than previously anticipated. The OBR's David Miles described the situation as "a pretty grim picture," noting "virtually no growth" for individuals since before the Covid pandemic.
The Bank of England is expected to raise interest rates next week, with forecasts suggesting they could reach as high as 4.5% in the coming years. Higher rates will make borrowing more expensive but could boost savings returns. Government borrowing is also set to increase due to higher debt interest payments and inflation-driven spending on welfare and pensions. However, the OBR cautions that these forecasts are uncertain, as the future of the Middle East conflict could alter economic expectations.