What we now know about the UK economy in four charts

The UK economy is presently grappling with the ramifications of the US-Iran conflict, despite the nation's lack of direct involvement. The Office for Budget Responsibility (OBR) predicts that soaring energy prices will stifle short-term growth, elevate inflation, and diminish living standards, as reported in their latest forecast.

Chancellor John Healey acknowledged the nation faces significant challenges ahead with policies aimed at providing households some respite. He emphasized that they cannot evade these global economic storms, but must navigate through them. The OBR's first assessment of the UK economy since the Middle East conflict ignited notes that rising energy prices pose the most substantial risk in the immediate future.

Notwithstanding a revised growth forecast for the current year, the OBR sharply reduced its prediction for next year from 1.6% to 1%. Economic expansion typically encourages businesses to invest more, generate jobs, and offer wage increases, thereby enhancing average living standards. Conversely, sluggish growth or contraction can have adverse effects.

The OBR anticipates inflation to intensify as higher energy bills permeate supply chains and reach consumers, especially in 2027. Currently, global oil prices are driving petrol prices to nearly £1.73 per litre on average, and diesel nears £1.99.

While government-imposed cost-of-living measures offer some relief, economists at Pantheon Macroeconomics argue they are insufficient given the projected surge in inflation over the winter. High inflation will likely depress living standards, and the OBR forecasts a decline in real household disposable income next year. Those with lower incomes are expected to bear the brunt of rising energy costs, as they constitute a larger portion of their monthly budget and disposable income.

The OBR's David Miles lamented the "virtually no growth" for individuals since before the Covid pandemic, deeming it a dismal period in British economic history.

The Budget provides some support for those under 25, though it leaves much to be desired. Inflation is projected to average 3.4% next year, before settling at the Bank of England's 2% target towards the decade's end. The Bank is expected to raise interest rates next week due to higher inflation. Rates are currently at 3.75%, but the OBR now forecasts they could escalate to as high as 4.5% in subsequent years.

Higher rates increase borrowing costs for individuals and corporations, while also boosting returns on savings. Inflation also elevates the cost of borrowing for the government, leading to increased spending on debt interest and more borrowing overall.