UK Chancellor of the Exchequer lowers economic growth forecast for 2026

Investing.com - UK Chancellor Rachel Reeves detailed the country’s downward revision of economic growth forecasts earlier Tuesday in her budget update speech, even before the Middle East events that could have an impact.

The government’s official forecast agency, the Office for Budget Responsibility (OBR), lowered its growth expectation for 2026 from 1.4% predicted in the fall budget three months ago to 1.1%.

Additionally, the OBR said its latest core forecast shows the unemployment rate will peak at 5.3% in 2026, higher than 4.75% in 2025 and above the 4.9% peak forecast in November last year.

The agency also raised its unemployment rate forecast for 2027 from 4.6% to 4.9%.

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In a statement, the OBR said: “The weakness in the labor market still appears mainly due to new entrants finding it difficult to find work amid weak demand. We expect this weak demand to persist in the short term as output remains below the economy’s supply potential.”

This is bad news for the Labour government, especially for Reeves, as the government continues to struggle in polls and recently faced a defeat in a by-election at a former Labour stronghold in Manchester.

In her speech to Parliament, Reeves said: “The current government has set the right economic plan for our country, and this plan has become even more important in a world that has become more uncertain in recent days.”

“I and this government have a responsibility to chart a course amid this uncertainty, ensuring our economy is shielded from shocks and protecting families from turbulence beyond our borders.”

However, the war launched by the US and Israel against Iran has caused energy prices to soar, and these forecasts could soon be overtaken by its impacts, potentially negatively affecting UK inflation and growth.

Capital Economics analysts noted in a report: “The Middle East conflict has changed the outlook, with the risk that soaring energy prices will mean UK inflation and interest rates will be higher than the OBR’s forecasts, and real GDP growth will be lower. In other words, by the time the budget is announced, government borrowing is likely to be higher, and the Chancellor’s room for maneuver will be more limited.”

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