Soaring global energy prices, stemming from the widening Middle East conflict, could undermine Rachel Reeves’s economic plans, economists have warned ahead of her spring forecast delivery today.
Economic Headwinds
Responding to the latest projections from the independent Office for Budget Responsibility (OBR), Reeves will maintain she has “the right economic plan for our country, in a world that has become more uncertain.” The new forecasts are expected to show the public finances moving in a positive direction, with a £22bn fiscal buffer – established in the November budget – remaining largely unchanged.
However, experts caution that the OBR projections may quickly become outdated should Monday’s surge in oil and gas prices persist. Benchmark European gas prices rose by more than 40% on Monday, while the price of a barrel of Brent crude oil surged 6% amid supply disruption fears.
“Just when Reeves thinks the economy is on a slightly more even keel, the government is now confronting a crisis that’s completely outside its control and it creates another massive headwind,” stated Mujtaba Rahman of Eurasia Group. He added that the cost of living and interest rates – areas Reeves has emphasized – are now most at risk.
Potential Outcomes
Despite these challenges, Reeves intends to project stability and continuity in Tuesday’s statement, following a turbulent period leading up to last autumn’s budget. She will assert that “because of the decisions we have already taken, we have a stronger and more secure economy. Inflation and interest rates are falling. And in every part of Britain, working people are better off.”
James Smith, chief economist at the Resolution Foundation, noted that the Gulf crisis has led to a higher inflation outlook and greater cost of living pressures, particularly if the conflict continues. Prior to the US bombing campaign, markets anticipated an 80% chance of an interest rate cut at the Bank of England’s next meeting on March 19th; however, this probability dropped to just above 50% by late Monday afternoon.
Reeves’s team has been hoping for further rate cuts to stimulate investment and consumer spending. Chris Beauchamp, chief market analyst at IG, likened the current situation to the price spikes following Russia’s invasion of Ukraine, suggesting it “could be dashed, as a price spike similar to 2022 causes a major headache for both policymakers and consumers, potentially disrupting the plan for more UK rate cuts.”
The Liberal Democrats have called on Reeves to cancel the planned fuel duty increase in September, arguing it would exacerbate the financial strain on families. Daisy Cooper MP stated that proceeding with the increase “would be disastrous” given the anticipated fuel price increases.
The OBR’s forecast will also consider the lower yield on UK government bonds since the budget, which reduces borrowing costs for the Treasury. However, this positive movement is also threatened by the Middle East conflict, as evidenced by a modest gilt sell-off on Monday, increasing 10-year yields by five basis points to 4.28%.
Frequently Asked Questions
What is Rachel Reeves planning to address in her spring forecast?
Reeves will insist she has “the right economic plan for our country, in a world that has become more uncertain” and that the public finances are moving in the right direction, with a £22bn fiscal buffer largely unchanged.
How have oil and gas prices been affected by the Middle East conflict?
Benchmark European gas prices rose by more than 40% on Monday, and the price of a barrel of Brent crude oil surged by 6% amid fears about supply disruptions.
What impact could the conflict have on interest rate cuts?
Before the US bombing campaign, markets anticipated an 80% chance of an interest rate cut at the Bank of England’s next meeting on March 19th, but this probability dropped to just above 50% by late Monday afternoon.
How might global events influence the UK’s economic trajectory in the coming months?
