The UK may have no involvement in the US-Iran war, but the country is feeling the full force of the conflict on its economy. Soaring energy prices are set to dent growth in the short term, push up inflation and leave living standards in a "grim" place, according to the latest official forecast from the Office for Budget Responsibility (OBR). Interest rates are also predicted to rise, making borrowing more expensive, along with government debt repayments.
Chancellor John Healey warned the nation faces "real challenges ahead" as he announced policies that he said would offer "breathing space" for households in the coming months. "What we face today are global economic storms," he said. "We can't wish them away.
We must choose the course we steer through them." In its first assessment of the UK economy since the Middle East conflict started, the OBR said rising energy prices were the biggest risk to the economy in the near future. Despite raising its growth forecast for this year, it sharply cut its prediction for next year from 1.6% to 1%. Growth is then set to rebound in the following years.
When an economy grows, businesses tend to invest more, create more jobs and give pay rises to workers, which leaves people feeling better off on average, though it can take time and not everyone necessarily benefits. Companies making higher profits also pay more in tax, which can enable the government to spend more on public services. When there is slow economic growth, or the economy shrinks, the opposite can occur.
Inflation can weigh on growth and the OBR has forecast that prices are set to rise at a faster pace as higher energy bills filter through supply chains and to consumers, especially in 2027. High global oil prices have already hit drivers at the pumps, with petrol priced at almost £1.73 per litre on average, while diesel is near £1.99. Elevated oil prices over time can lead to prices edging upwards across a host of goods, such as food, as companies pass on the higher expenses they face to consumers.
Goods are typically transported to destinations by lorries and vans, so high fuel prices can have far-reaching consequences. The OBR now thinks inflation will stay higher for longer than previously forecast, peaking at 3.8% in 2027. Despite the cost-of-living support announced by the government, economists at Pantheon Macroeconomics said the measures were "small beer given the surge in inflation we expect over the winter".
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