OBR warns UK economy faces growth cuts and higher inflation from energy crisis

The UK economy faces a severe squeeze on growth alongside persistent inflationary pressures, as fallout from conflict ripples through domestic energy markets and supply chains, according to official forecasts released by the Office for Budget Responsibility (OBR). Although the UK has no direct involvement in the conflict, the economic repercussions are hitting home. Spikes in energy prices represent the single greatest near-term threat to the nation's financial stability, leaving living standards on a grim trajectory.

Growth forecasts illustrate the cooling economic climate. While the OBR raised its growth forecast for the current year, it sharply cut its prediction for next year from 1.6% down to 1%. Slower economic expansion typically hampers business investment, job creation, and wage growth, subsequently reducing tax revenues that fund public services. Compounding the issue, inflation is projected to stay higher for longer than previously forecast, peaking at 3.8% in 2027 as elevated energy bills filter through consumer goods and supply chains. Inflation is expected to average 3.4% next year before eventually falling back towards the Bank of England's 2% target closer to the end of the decade.

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Transport expenses offer an immediate window into the crisis. High global oil prices have driven pump prices significantly higher, with petrol priced at almost £1.73 per litre on average and diesel hovering near £1.99. Because commercial logistics rely heavily on vans and lorries to transport goods to their destinations, these sustained high fuel costs inevitably cascade into everyday items like food, stretching household budgets thin.

Low-income households will absorb the heaviest blows from these shocks. Energy outlays consume a vastly larger proportion of their monthly budgets and disposable income, hitting their spending power directly. David Miles of the OBR noted that individuals have experienced virtually no growth since before the Covid pandemic, creating a bleak environment for personal finances. Real household disposable income is forecast to grow from 2027, but not by as much as previously thought.

In response to the mounting crisis, Chancellor John Healey unveiled economic policy measures in a budget address. Healey warned the nation that it faces real challenges ahead while announcing policies intended to offer breathing space for households in the coming months. However, independent analysts at Pantheon Macroeconomics dismissed the government interventions as small beer given the scale of winter inflation anticipated.

Financial markets are similarly bracing for potential shifts in borrowing costs. The Bank of England faces mounting pressure to adjust rates upward from their current 3.75% due to higher inflation in recent months, with OBR projections suggesting a potential ceiling of 4.5% in the coming years. While higher rates can boost returns on savings, they simultaneously make borrowing more expensive, inflate government debt interest repayments, and increase overall government borrowing year on year.

Uncertainty remains a dominant theme across all forecasts. The OBR admitted that there is significant uncertainty around its predictions given how the conflict in the Middle East has upended previous expectations, noting that the future trajectory of the war could alter inflation expectations further. Meanwhile, political developments abroad, such as US President Donald Trump suggesting the war will end after upcoming mid-term elections, add further variables to global energy markets.

What to Watch Next

• The Bank of England's upcoming interest rate decision, with markets widely expecting a rate rise following recent sticky inflation readings.
• Future updates to OBR fiscal projections, which remain subject to rapid geopolitical shifts in the Middle East and ongoing energy market volatility.
• The implementation timeline for announced government support packages and how upcoming winter utility pricing impacts lower-income households.