Britain’s economy is at high risk after the OECD cut its 2026 growth forecast and raised its inflation forecast following the Iran war. The blow to the Labour government’s fiscal plan, which relies on economic growth to fund public services, has put Rachel Reeves’ administration under pressure.
Britain is the most vulnerable Western country to the crisis due to its heavy reliance on natural gas to generate electricity. Gas prices, which have doubled this month, have triggered a spike in inflation expectations among citizens and lowered consumer confidence to alarming levels.
The impact of rising prices is already being felt directly at the pump and is expected to spread to the food sector next month, especially greenhouse products. Major retailers have also warned of a 10% rise in the price of essential goods if the conflict drags on, while mortgage rates in the housing market are starting to soar.
The Bank of England (BoE) is faced with a dilemma with its benchmark interest rate already at 3.75% amid rising unemployment. While the BoE fears a repeat of the 2022 inflation spike, the scope for raising borrowing costs is smaller than in previous crises given the current sluggish economic growth.
From a fiscal perspective, the scope for government assistance is very limited with public debt at 93% of GDP. Chancellor of the Exchequer Rachel Reeves has signalled that any government assistance will only be targeted at the most needy to avoid a backlash from bond markets which are closely monitoring the country’s financial discipline.
