In a routine budget update delivered on Tuesday, finance minister Rachel Reeves announced a downgraded growth profile for the U.K., reflecting fresh official forecasts published by the Office for Budget Responsibility (OBR).
The OBR lowered its projected expansion for 2026 to 1.1%, down from the 1.4% growth it had estimated three months earlier in the Autumn Budget. Alongside that revision, the independent forecaster signalled a bigger rise in unemployment than previously expected.
Under the OBR's central projection, the unemployment rate will peak at 5.3% in 2026, up from 4.75% in 2025. That represents an upward adjustment compared with the 4.9% peak the OBR had forecast in November. The OBR also revised its estimate for 2027 unemployment to 4.9%, up from the 4.6% it had previously signalled.
The OBR offered an explanation for the weaker labour market showing: "Labor market weakness still appears to be driven primarily by entrants into the labor force struggling to find work amid subdued hiring demand. We expect this weak demand to continue in the near term as output falls further below the economy's supply potential," the forecaster said in its statement.
Those weaker projections present a political challenge for the Labour government and for Reeves personally, who has faced recent electoral setbacks, including defeat in a by-election at a seat that had been a former stronghold in Manchester.
Addressing parliament, Reeves defended the government's plan for the economy while acknowledging global uncertainty. "This government has the right economic plan for our country, a plan that is even more important in a world that in the last few days has become yet more uncertain," she said. She added: "It is incumbent on me and on this government to chart a course through that uncertainty, to secure our economy against shocks and protect families from the turbulence that we see beyond our borders."
Forecasters warned that the OBR's numbers could be overtaken by recent geopolitical events. The outbreak of a U.S.-Israeli war against Iran has been associated with a sharp jump in energy prices, an immediate factor that could feed through to higher inflation and weaker real growth in the U.K.
Analysts at Capital Economics noted that the conflict in the Middle East "has changed the outlook and the risks are that the leap in energy prices will mean U.K. inflation and interest rates are higher than the OBR is forecasting and real GDP growth will be lower. In other words, come the Budget, there is a real risk that government borrowing will be higher and the Chancellor's headroom will be lower," they wrote.
Those warnings underline the near-term uncertainty facing fiscal planning. Higher-than-expected energy costs could push inflation and interest rates above the OBR's current assumptions and reduce room for manoeuvre in public finances, with implications for borrowing and fiscal headroom.
What this means
- The official forecaster has trimmed medium-term growth expectations and lifted unemployment projections, reflecting subdued hiring demand and weak output.
- Political pressure on the government may grow given the economic downgrades and recent electoral setbacks.
- Geopolitical-driven energy price moves could quickly alter the outlook for inflation, interest rates, growth and public borrowing.