What we now know about the UK economy in four charts

What we now know about the UK economy in four charts

The UK may not be directly involved in the US-Iran war, but the conflict is still hitting the economy hard.

Interest rates are also expected to climb, which will make borrowing more costly, as well as increase government debt repayments.

Chancellor John Healey said the country faces "real challenges ahead" as he set out policies he said would provide "breathing space" for households over the coming months.

"What we face today are global economic storms," he said. "We can't wish them away. We must choose the course we steer through them."

In its first look at the UK economy since the Middle East conflict began, the OBR said rising energy prices were the biggest short-term threat to the economy.

Although it lifted its growth forecast for this year, it cut its projection for next year sharply, from 1.6% to 1%.

Growth is then expected to pick up again in the years after that.

When an economy expands, businesses usually invest more, create more jobs and raise workers' pay, which can leave people feeling better off on average, although this can take time and not everyone necessarily gains.

Companies making bigger profits also pay more tax, which can allow the government to spend more on public services. When growth is weak, or the economy contracts, the reverse can happen.

Inflation can hold back growth, and the OBR has predicted that prices will rise faster as higher energy bills work their way through supply chains and on to consumers, particularly in 2027.

High global oil prices have already affected motorists at the pump, with petrol averaging almost £1.73 per litre and diesel close to £1.99.

Over time, higher oil prices can push up the cost of many goods, including food, as companies pass on their increased expenses to customers.

Because goods are usually moved by lorries and vans, expensive fuel can have wide-ranging effects.

The OBR now believes inflation will remain elevated for longer than it previously expected, reaching a peak of 3.8% in 2027.

Even with the government's cost-of-living support, economists at Pantheon Macroeconomics said the measures were "small beer given the surge in inflation we expect over the winter".

High inflation gives a gloomy outlook for living standards, and the OBR has forecast a fall next year as energy bills reduce household spending power.

People on lower incomes are likely to be hit harder, because energy costs take up a larger share of their monthly budgets and disposable income.

Real household disposable income, a measure of living standards, is expected to rise from 2027, but not as much as previously thought.

"It's a pretty grim picture," said the OBR's David Miles, who said there has been "virtually no growth" for individuals since before the Covid pandemic.

"It's been a dismal period in British economic history."

Inflation is forecast to average 3.4% next year before easing back to the Bank of England's 2% target toward the end of the decade.

The Bank is widely expected to raise interest rates next week because of higher inflation in recent months. Rates are currently 3.75%, but the OBR now thinks they could reach as high as 4.5% in the coming years.

It had previously expected two interest rate cuts this year.

Higher rates make borrowing more expensive, but they can improve returns on savings.

Inflation also increases the government's borrowing costs, with debt interest spending set to rise.

Those repayments are also expected to push up the total amount the government borrows, which is now forecast to rise each year by more than the OBR had previously predicted.

Higher welfare and pension spending because of inflation is also expected to add to borrowing, although it is forecast to fall as a share of the economy over the next five years.

However, forecasts are only the best estimate of what may happen in the future. Given how the conflict in the Middle East has overturned earlier predictions, the future course of the war could change inflation expectations.

US President Donald Trump has suggested the war will end after the mid-term elections next month.

The OBR acknowledged there was still "significant uncertainty" around its forecasts because of the changing situation in the Middle East.