Spring Statement reaction: Chancellor’s confidence may be short-lived if higher energy costs derail economic improvement

The Chancellor’s upbeat Spring Statement which was announced to parliament this lunchtime, has clearly been overshadowed by events unfolding in the Middle East. The increasing global instability is threatening to drive up inflation, particularly the rising price of gas, to the detriment of the forecasts released today by the OBR. Only time will tell of course.

In the meantime, Dan Coatsworth, head of markets at AJ Bell, comments on the Spring Statement saying:

“While the numbers are generally pointing in the right direction, it still feels like we’re watching progress in slow motion. The OBR’s new forecasts indicate a more lacklustre economy near-term, meaning the UK continues to be stuck in the mud.

“Although there is hope on the horizon in the form of upgraded economic growth forecasts for 2027 and 2028, that is of little consolation to businesses hoping for a sales boost this year. It’s also worrying for consumers having to contend with a weak jobs market as there is no sign of a big improvement soon.

“Chancellor Rachel Reeves struck a confident tone in her speech, but she is sounding like a broken record. Once again, the message was about laying the foundations for stability today, but jam won’t come until tomorrow.

“While she might be right, and it’s certainly welcome to see a Spring Statement full of upgrades rather than widespread downgrades, the nation’s patience is wearing thin.

“Events in the Middle East threaten to hold back the UK economy even more if the spike in oil prices is sustained for weeks or months. That could drive up inflation and force the Bank of England to pause any further interest rate cuts in the interim.

“Higher inflation and rates no longer coming down has negative connotations for consumer and business sentiment, and in a worst-case scenario, could lead to economic disappointment and mean the OBR’s already-downgraded forecast is still too high. That situation might also mean Reeves’ prediction that UK employment is ‘set to peak later this year’ is also too optimistic.

“The OBR flags conflict in the Middle East and global trade policy as key risks to its economic forecasts, and they are the elephants in the room as far as Reeves is concerned.

“Financial markets took the Spring Statement in their stride as there was enough good and bad news to settle nerves. Gilt yields dipped before moving back up, sterling pulled back slightly, and the FTSE 100 stayed weak as its fortunes were almost entirely influenced by events in the Middle East rather than the chancellor’s update.”