Key TakeawaysUK Chancellor Rachel Reeves delivered a speech setting out new economic forecasts to the House of Commons.UK bond markets are reacting to a potential rise in inflation.The Office for Budget Responsibility says that the Middle East conflict could have a significant impact on global economies.
UK growth forecasts for 2026 were revised lower as part of the Spring Statement to parliament delivered by the chancellor, Rachel Reeves.
However, the budget speech was overshadowed by the war in the Middle East, where surging oil prices are sparking inflation worries and reducing expectations for a Bank of England rate cut.
The Office for Budget Responsibility now forecasts GDP growth of 1.1% this year, down from the 1.4% increase previously forecast last November and from the 1.3% recorded in 2025. However, there has been a slight upgrade to GDP growth from 2027 onward.
There was also a significant downgrade to employment expectations. The OBR’s new central forecast suggests the jobless rate will peak at 5.3% later this year, up from the 4.9% previously anticipated. The unemployment rate is then expected to gradually fall to 4.1% by the end of the decade.
On the plus side, the OBR made slight improvements to the chancellor’s “fiscal headroom” and revised inflation forecasts lower.
How Did Markets React to the Spring Statement?
Gilts continued to sell off and yields rise on Tuesday, though Morningstar economist Grant Slade said this was due to surging energy prices amid the ongoing Middle East conflict, rather than a reaction to the OBR’s forecasts. The UK two-year government bond yield approached 3.80%, a rise from 3.65% on March 3 as fixed-income investors anticipated a rise in inflation.
While the OBR forecast that inflation will drop to 2.3% in 2026, down from the 2.5% it forecast back in November, these figures run the risk of being obsolete, given they do not take into account the impact of the war.
The OBR said: “Conflict in the Middle East, which escalated as we were finalizing this document, could have very significant impacts on the global and UK economies.”
While an interest rate cut at the next Bank of England meeting on Mar. 19 looked priced in a month ago, futures markets now assign a less than a 15% probability to a cut now as the central bank monitors the impact of the conflict on domestic inflation.
The FTSE 100 was also down 2.5% ahead of the lunchtime statement, leaving it on course for the worst day since last April’s US tariff shock. The UK index continued to fall after the speech and was down more than 3% at the close.
Will the Middle East Conflict Be Short-lived?
However, Hargreaves Lansdown chief investment strategist Emma Wall says the market’s caution over interest rates is overly pessimistic.
She says the Middle East crisis has echoes of the 1979 Iranian revolution, which resulted in the price of crude oil doubling over the course of a year, causing higher global inflation and slower economic growth.
“It will be this stagflation risk that equity and bond markets are most sensitive to, but the dynamics of the oil market have evolved significantly over the past 45 years,” she says.
“Crucially, while oil prices may be higher now, consensus is that this disruption is transitory—and so too will the impact be on wider asset classes. In the event of an effective transition of power—and end to the fighting—oil prices are expected to return to USD 65 a barrel within weeks, and therefore the likelihood of a global growth shock is minimal.”
What Does the Spring Statement Mean for the 2026 Autumn Budget?
As expected, the chancellor made no changes to tax or spending, sticking to her pledge to limit major policy changes to the Autumn Budget.
For the first time, the OBR did not publish a formal assessment of the government’s progress toward its “non-negotiable” fiscal rules, which are that budgets must be in balance or surplus and that net financial debt should fall as a share of the economy by 2029/30.
However, the forecasts show the chancellor’s “fiscal headroom” has increased to £23.6bn from £21.7bn. Meanwhile, the UK government is predicted to achieve a budget surplus of 0.7% in fiscal year 2029-30, a 0.1 percentage point improvement on the previous forecast.
Morningstar UK economist Grant Slade says this may provide the government with “a little extra wiggle room” on spending come the Autumn Budget later this year, assuming the Middle East conflict turns out to be a short-lived shock to the UK economy.
After a raft of new personal finance measures were announced at the Autumn Budget, the Spring Statement contained no further details on pensions, ISAs and tax.
Autumn Budget 2025: The Measures in Full 
Looking ahead to the autumn, Malcolm Reynolds, UK president of pension group Aptia, says with an increase in fiscal headroom, the group would have welcomed reassurance around rumored pension policy changes in the run up to the next Budget.
“A clear message would have helped manage expectations, reduced unnecessary pressure on operational teams and, importantly, avoided knee-jerk reactions from members that we have witnessed in previous years, and which often cannot, with the benefit of hindsight, be reversed.”
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