UK markets declined sharply this week, with the FTSE 100 Index falling 4.6% to trade at 10,350 points at the time of writing.
UK Chancellor, Rachel Reeves delivered her Spring Statement on Tuesday, in which she claims to have “restored economic stability” in the face of global uncertainty as she presented new official forecasts on the economy to MPs. However, the projections from the Office for Budget Responsibility came as the Middle East conflict triggered a surge in energy prices and a big sell-off in gilts and caused traders to scale back bets on Bank of England interest rate cuts.
The Office for Budget Responsibility is forecasting economic growth of 1.1% in 2026, down from 1.4% in November 2025, but better than 0.9% forecast by the Bank of England in February. Growth is set to pick up to 1.6% in 2027 and 1.6% in 2028, compared with a previous 1.5% forecast in November for both years. Inflation is set to decline from 3.4% in 2025 to 2.3% this year, lower than the November forecast of 2.5% for 2026.
Unemployment is expected to rise to 5.4% this year, up from a 4.9% forecast in November. It will fall to 4.9% next year, higher than 4.6% previously estimated. Net migration is set to be 235,000 a year on average between 2026 and 2030, down from a November forecast of 295,000. GDP per capital growth, a measure of living standards, is set to rise from 0.8% in 2026 to 1.3% in both 2027 and 2028. The figure for 2027 and 2028 is higher than previously expected.
The current budget is set to turn into a surplus by 2028-29, meeting the government’s “stability” rule of matching day-to-day spending with revenues by the end of the decade. Reeves’ headroom against her key fiscal rule is forecast to be £23.6 billion, larger than the £21.7 billion she built up in November.
However, the Office for Budget Responsibility has said that Britain’s economy could face a “very significant” hit from the war in Iran and admitted that its projections were subject to huge uncertainty. The chance of a 0.25% interest rate cut at the Bank of England’s meeting this month has fallen to less than 20% from 90% last Friday.
Investors are now expecting just one cut by the end of the year, down from two reductions last week. The movements reflect concerns that the UK is heavily exposed to surging gas prices, which threaten to impede the Bank of England’s efforts to return inflation to its 2% target. Consumer price inflation was 3% in January.
Higher energy prices hit UK consumers most immediately through petrol pump prices, with each $10 per barrel rise in the oil price typically adding about 0.1% to consumer price inflation within months, and by as much again as higher costs pass down supply chains.
Commodity markets
In the commodity markets, Brent crude futures traded around $89 per barrel on Friday surging over 20% this week, after the US and Israel started a military conflict with Iran on February 28th that has halted tankers from moving through the Strait of Hormuz, which typically carries roughly one-fifth of the world’s daily oil supply.
The outbreak of war in the key Middle East energy producing region has also shut refineries and oil output and shuttered liquefied natural gas plants. A senior White House official said on Thursday that the US Treasury Department is expected to announce measures to combat rising energy prices from the Iran conflict, including potential action involving the oil futures market, without providing any details.
The potential move would mark an unusual attempt by Washington to influence energy prices through financial markets rather than physical oil supplies. To ease physical supply constraints, which have caused refineries, especially in Asia, to start reducing their fuel processing, the Treasury also granted waivers for companies to start buying sanctioned Russian oil stored on tankers. The first waivers were given to Indian refiners who have responded by buying millions of barrels of prompt Russian crude oil cargoes, sources said, reversing months of pressure on them to halt the purchases.
Analysts have cautioned that the recent gain in prices is relatively subdued compared to other price shocks, particularly after the full-scale Russian invasion of Ukraine in 2022, when prices rose above $100 a barrel.
Gold prices traded around $5,090 an ounce on Friday and are set for a weekly fall as fading interest rate-cut prospects and a stronger dollar offset gold’s geopolitical risk premium.
Equity markets
US equity futures fell on Friday, after Wall Street came under renewed pressure in the previous session, as investors grappled with uncertainty surrounding the Iran war and surging oil prices.
In Thursday’s regular trading session, the Dow Jones Industrial Average dropped 1.61%, the S&P 500 lost 0.56%, whilst the Nasdaq Composite declined 0.26%. US Treasury secretary Scott Bessent has said that the global tariff the White House imposed following its Supreme Court defeat will probably be lifted from 10% to 15% this week.
US President, Donald Trump announced the tariff rate last month after the supreme court ruled that the majority of the duties imposed as part of the administration’s trade war were illegal. The administration had threatened a 15% tariff but has so far only imposed a 10% rate, saying the higher duty would follow without specifying when.
The White House turned to a new series of laws to resurrect Trump’s tariff regime and uphold a series of agreements struck with its major trading partners. It invoked a seldom-used piece of legislation, Section 122 of the Trade Act of 1974, to immediately impose fresh levies on imports to the US for 150 days.
The US also retains tariffs on industries, including steel, aluminium and autos, using different legal authority. The White House is expected to launch further probes that could lead to more levies. The US government has declined to refund the tariffs that the Supreme Court has ruled illegal, as the Trump administration tries to hold on to as much as $150 billion in disputed levies.
Customs officials are rejecting companies’ attempts to reclaim duties imposed under emergency powers invoked by President Trump, leaving businesses in limbo and pushing more cases into court.
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