UK economy to slow sharply as energy prices and inflation bite, OBR warns

Economic outlook worsens amid energy price surge

The UK economy is facing significant pressure as the fallout from the US-Iran war drives energy prices to unprecedented levels, according to the latest forecast from the Office for Budget Responsibility (OBR). Chancellor John Healey described the situation as presenting "real challenges ahead," citing slower economic growth, higher inflation, and a dip in living standards as key concerns.

The OBR revised its growth forecast for next year downward from 1.6% to 1%, though it anticipates a rebound in subsequent years. Inflation, meanwhile, is expected to peak at 3.8% in 2027, fueled by rising energy bills and broader price pressures. Living standards, measured by real household disposable income, are forecast to decline next year before recovering modestly from 2027.

Interest rates and borrowing set to rise

The Bank of England is widely expected to raise interest rates next week in response to persistently high inflation. Rates, currently at 3.75%, could climb as high as 4.5% in the coming years, increasing the cost of borrowing for businesses and households. The OBR had previously projected two rate cuts this year, but these plans now appear unlikely.

Higher inflation is also driving up government borrowing costs. Debt interest spending is set to rise, compounded by increased welfare and pension outlays due to inflation. The OBR forecasts borrowing to exceed earlier projections every year, reflecting the broader economic strain.

Uncertainty clouds forecasts

The OBR acknowledged "significant uncertainty" in its projections, primarily due to the fluid situation in the Middle East. While US President Donald Trump suggested the conflict could de-escalate after next month’s mid-term elections, the OBR’s forecasts remain contingent on how energy markets and geopolitical developments evolve.

Rising energy prices were identified as the biggest near-term risk to the UK economy. Average petrol prices have reached £1.73 per litre, while diesel is nearing £1.99, further squeezing household budgets. The government has announced measures to provide "breathing space" for households, though details remain scarce.

Link to UK financial innovation

This economic update follows recent milestones in the UK’s financial sector, including the completion of the world’s first interbank transactions using tokenised deposits. While unrelated to the OBR’s forecast, these developments highlight the broader challenges and opportunities facing the UK’s financial infrastructure amid economic uncertainty. For more, see our earlier report on UK Banks Complete First Interbank Transactions Using Tokenised Deposits.

What this means

Lazyfounder analysis — our interpretation, not reported fact.

For founders and operators, the OBR’s forecast signals a period of tighter financial conditions. Higher interest rates will increase the cost of capital, making growth investments more expensive and potentially slowing consumer spending. Startups in energy-dependent sectors—like transport, manufacturing, and logistics—may face margin pressure from rising fuel costs, while those in consumer-facing industries could see demand decline as households prioritise essential spending.

The uncertainty around energy prices and geopolitical developments also complicates planning. Founders may need to stress-test their business models against scenarios like prolonged inflation or further spikes in borrowing costs. For investors, the forecast reinforces the need for caution, particularly in sectors vulnerable to economic cycles or reliant on discretionary consumer spending.

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