| The Spring Forecast provided updated economic predictions, but this pre-dated the emerging geopolitical tensions | The Middle East conflict adds uncertainty, potentially increasing inflation and disrupting global markets beyond initial forecasts | Policymakers must monitor evolving events to adapt strategies and maintain economic resilience in volatile conditions |
Set amid the backdrop of the emerging Middle East conflict, the Spring Statement on 3 March, provided an opportunity for the Chancellor to unveil updated economic forecasts from the Office for Budget Responsibility (OBR). In reality, these forecasts, which were developed before the onset of the war, did not take into account the widening conflict and increasing disruption to the global economy, not least the impact on inflation caused by the oil disruption.
As such, Lindsay James, Investment Strategist at Quilter, made this observation after the event, “The Spring Statement should have been a non-event, used primarily as a source of political capital by Rachel Reeves. She did indeed share OBR forecasts that predicted improving headroom against fiscal rules, marginally lower inflation in coming years, lower gilt yields and lower interest rates. However, given events unfolding in the Middle East, today’s statement already looks a little out of date.
Bond yields have risen sharply, expectations for rate cuts have been tapered from two this year to just closer to one, while gas prices have spiked significantly in the last 24 hours, providing fresh fears a looming burst of inflation is coming should the Middle East conflict become protracted. Fiscal headroom, as a result, may need recalculating in weeks to come. Rachel Reeves has historically spoken about shielding the UK economy from future shocks, so this will be a real test of that mantra.
Looking at the specific forecasts, while the OBR has downgraded growth for this year, it has subsequently upgraded it for the next two years – although the net outcome remains the same. Rachel Reeves likes to say this Labour government is stimulating the economy, but the reality is the forecast and the actual results remain underwhelming at best. Reeves said she wouldn’t be satisfied with these forecasts being reality, and neither she should be, but whether she can in fact beat them is subject to events outside of her control.
The problem she has is the OBR admits the fiscal outlook remains challenging, before even getting into any geopolitical shocks. The tax burden remains high, demographic pressures are intensifying and debt to GDP ratio could soar without a significant turnaround in fortunes. Global shocks to the economic system have had outsized influence on the economy in the past – with another looming, it is unclear where the growth will come from to help counteract those impacts.
As a result markets are likely to give little heed to today’s announcements, focusing instead on the “new reality we find ourselves in.”
Addressing the conflict and reiterating her commitment to defence spending, Rachel Reeves said the government will plot a course through the current uncertainty and “secure the economy through shocks.”
Reiterating the government’s intention to hold one key fiscal event each year – the Budget in the Autumn – Reeves said, “Stability is the single most important precondition for economic growth… limiting major policy changes to the Budget and giving businesses and households the certainty they need.”
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