An economic forecast warns that potential repercussions from the Iran conflict could lead to significant challenges for the UK economy. Oxford Economics projects that the ongoing Middle East tension could exacerbate the country’s sluggish growth, potentially resulting in 150,000 job losses and a rise in inflation to 4.5% this year. This inflation spike surpasses previous estimations, including the 3.5% peak predicted by the Bank of England and other experts.
Michael Saunders, an Oxford Economics senior advisor and former Bank of England rate-setter, expressed concerns over the grim economic outlook even if the conflict concludes shortly. He highlighted the adverse effects on households due to escalating fuel and other expenditures, estimating that the average household could see a £730 annual decrease in their finances.
The economic worries extend to the potential secondary impacts of the conflict, such as workers demanding higher wages to counter anticipated inflation. The Bank of England faces the challenge of managing public inflation expectations as it considers adjustments to its current 3.75% base rate. Saunders suggested a possible rate increase to 4.25% later in the year if inflation reaches 4% by July.
While some experts, like Liz Martins from HSBC, anticipate a more moderate inflation rise to around 3.5%, the Resolution Foundation anticipates significant financial setbacks for UK households due to the Middle East conflict. The think tank estimates a collective £11 billion cost to households this year from an energy shock linked to the war, with potential long-term consequences on government borrowing, projecting a £16 billion impact by 2029/30.
Simon Pittaway, a senior economist at the Resolution Foundation, emphasized the uncertainty surrounding the conflict’s trajectory and its detrimental financial implications. He underscored the immediate and future economic challenges, including rising energy costs and potential hits to public finances. Despite these concerns, he acknowledged the Chancellor’s prudent fiscal planning, which may help mitigate the economic shocks through targeted and temporary measures to safeguard fiscal rules.
