Britain’s growth forecast just got slashed to 1.1% – as markets face the worst day in a year
The UK’s economic outlook took a hit on Tuesday as the independent Office for Budget Responsibility (OBR) downgraded its growth forecast for 2026 to just 1.1%, down from 1.4% predicted in November.
This revision comes amid surging energy prices driven by escalating tensions in the Middle East, including the ongoing conflict involving Iran, which has sent global markets into turmoil.
Chancellor Rachel Reeves, delivering her Spring Statement in the House of Commons, defended the government’s economic strategy, insisting it has “restored economic stability in an uncertain world.”
She highlighted that inflation is falling faster than previously anticipated, borrowing is down, and living standards are rising. “People will be over £1,000 a year better off by the next election, even after accounting for inflation,” Reeves told MPs.
The OBR now expects GDP growth to rebound slightly to 1.6% in 2027 and 2028, before easing to 1.5% in 2029 and 2030, keeping average growth across the period largely steady.
Growing concerns
But economists are sounding alarms that the situation could deteriorate further. The downgrade reflects persistent challenges, including hiring hesitancy linked to past policies and underwhelming productivity growth.
More pressingly, the OBR’s forecasts do not yet account for recent spikes in energy costs triggered by the Middle East crisis. Natural gas prices have more than doubled to 170p per therm since markets reopened, far exceeding the OBR’s assumption of 78p.
A sustained 20% rise in oil prices could add 0.2% to 0.3% to inflation, potentially delaying Bank of England interest rate cuts and squeezing household budgets.
“Soaring global energy prices will jeopardise Rachel Reeves’s plan to conquer inflation and revive sluggish UK economic growth,” economists have warned.
Jess Ralston, Head of Energy at the Energy and Climate Intelligence Unit, added that the UK remains “dangerously underprepared for another energy crisis,” echoing concerns from a recent energy crisis commission.
Markets tumble
The news sent shockwaves through financial markets. The FTSE 100 plunged 2.6%, or about 280 points, to 10,501, marking its worst day in nearly a year.
The pound hit a three-month low against the dollar, underscoring broader investor jitters.
This isn’t the first downgrade for the UK economy. In recent years, forecasts have been repeatedly revised lower due to external shocks. Last April, the International Monetary Fund (IMF) slashed its 2025 UK growth projection to 1.1% amid fears of U.S. tariffs under President Donald Trump and rising borrowing costs.
Domestically, the picture is mixed. Unemployment rose to 5.2% in the three months to December 2025, the highest in nearly five years, and is expected to peak later this year before declining.
Inflation eased to 3% in January 2026, still above the Bank of England’s 2% target, but the OBR anticipates a quicker drop thanks to Budget measures.
Reeves emphasised policies like scrapping the two-child benefit limit, which could reduce child poverty to record lows, and increasing the minimum wage. She also pledged investments in defence, aiming to make the UK an “industrial defence superpower,” with £2.2 billion allocated.
