The UK government has cut its economic growth forecast for 2026, as Chancellor Rachel Reeves delivered a Spring Statement overshadowed by mounting concerns over the economic impact of the escalating conflict in Iran.
The fiscal update comes as Prime Minister Keir Starmer’s Labour government attempts to revive sluggish growth, now facing fresh pressure from rising energy prices linked to instability in the Middle East. Reeves said the government’s economic strategy was “even more important in a world that in the last few days has become yet more uncertain with unfolding conflict in Iran and the Middle East”.
Britain’s economic growth is now projected to slow to 1.1 per cent in 2026, down from the 1.4 per cent forecast made in November when Labour presented its annual budget. The UK economy expanded by 1.3 per cent last year. The revised projections were published by the Office for Budget Responsibility (OBR), which also upgraded growth forecasts for 2027 and 2028 to 1.6 per cent.
However, the OBR noted that the figures were finalised before the United States and Israel launched strikes on Iran over the weekend, followed by retaliatory action across the region. “Conflict in the Middle East, which escalated as we were finalising this document, could have very significant impacts on the global and UK economies,” the OBR said in its March report.
Concerns are growing that disruption to oil and gas supplies could trigger a renewed energy crisis, fuelling inflation and dampening consumer spending.
The Bank of England last month forecast that inflation would ease towards its two per cent target in April, helped by falling energy bills offsetting rising water charges and other costs. The central bank left its benchmark interest rate unchanged at 3.75 per cent in February but indicated that further rate cuts were likely.
Since the outbreak of hostilities, however, analysts have pared back expectations for interest rate reductions in 2026 as European gas prices and global oil benchmarks surged. Labour has faced persistent challenges in stimulating economic momentum since returning to power in July 2024, having implemented tax increases in its first two budgets.
The government said unemployment, currently at a five-year high of 5.2 per cent, is expected to peak later this year before gradually declining through to 2030. With global energy markets under strain and geopolitical uncertainty intensifying, officials acknowledged that the economic outlook remains highly sensitive to developments in the Middle East.
