Introduction: War in Middle East threatens UK living standards growth
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The dust is settling after Rachel Reeves’s spring forecast statement yesterday, which showed that growth will be weaker than hoped this year while unemployment will be higher.
While the chancellor claimed the UK could ‘beat the forecasts again’, economists are concerned that the ongoing Middle East crisis will hurt the economy, and household finances, badly.
The Resolution Foundation have just released their overnight analysis of the Office for Budget Responsibility’s forecast.
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The good news? The UK is set for a “decent”, one-off increase in living standards this year, and a bumper rise for lower-income families.
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The bad news? A fresh energy price shock risks wiping out these gains.
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The big picture? The medium-term picture for living standards remains bleak
According to Resolution’s calculations, living standards for typical working-age families are set to grow, by £300, over the coming year (between 2025-26 and 2026-27).
Lower-income households are set for a bigger bump in living standards, up 3.9% or £800. This would be the second strongest year for living standards in the past two decades for poorer families.
BUT if energy prices don’t drop, then all these gains will be wiped out.
If recent rises in the price of oil and gas were to be sustained they could add around a percentage point to inflation and £500 on to typical annual energy bills, Resolution say.
The energy price cap could raise by £500 in June says the Resolution Foundation. That puts everything else from the Spring Forecast in the shadows. Watch: https://t.co/KynP3Cq9mR
— Sam Coates Sky (@SamCoatesSky) March 3, 2026
Ruth Curtice, chief executive at the Resolution Foundation, says:
“The immediate economic outlook for Britain is highly uncertain, with yesterday’s forecasts already looking out of date, while the living standards picture for the rest of the Parliament is very lopsided.
“This coming year is set to be a decent one for living standards, and a bumper one for poorer families, as wages and benefit support rise above the level of inflation. But a fresh energy price shock risks puncturing this good news.
The agenda
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9am GMT: Resolution Foundation event on the spring forecast
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9.00am GMT: eurozone services PMI for February
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9.30am GMT: UK services PMI for February
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10am GMT: Eurozone unemployment report for January
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2.45pm GMT: US services PMI for February
Key events
US stock index futures are slightly higher, as investors assess the NYT’s report that suggested Iranian operatives had reached out to the US with an offer to discuss terms for ending the conflict.
The S&P 500 share index is on track to rise 0.4%, the futures market suggests.
NIESR: Middle East crisis could push UK interest rates up
Tom Knowles
Interest rates in the UK could rise back up above 4% if the war in the Middle East causes energy prices to stay higher for longer, a think tank has warned.
The National Institute of Economic and Social Research (NIESR) said that if the energy shock from the conflict persists for one year, then the Bank of England would be forced to push up borrowing costs from the current rate of 3.75%.
The think tank analysed two “What if?” scenarios for the energy market. Both cases involve oil prices rising a further 30%, equivalent to $100 a barrel, and gas prices rising a further 50%, equivalent to $70 a barrel equivalent.
In the first scenario, the analysis assumes the impact is transitory and energy prices begin to normalise after one quarter. In this case, NIESR said a temporary jump in energy prices would lead to a 0.3 percentage point (pp) increase in inflation alongside a “negligible impact” on GDP for 2026. It said central banks around the world would most likely understand the shock to be temporary and “look through” the impact.
[This, incidentally, is how BoE policymaker Alan Taylor argued central banks should act, on Monday]
However, in the second scenario, NIESR examined what would happen if the rise in oil and gas prices persisted for one year before normalising at a slower rate. It says this would lead to a 0.7pp increase in inflation in 2026 and 0.5pp increase in 2027 and dampen GDP growth by 0.2% in 2026. It says this rise in inflation would cause the Bank of England to increase rates by 0.8pp, which at the current rate of 3.75% would see it increase to 4.5%.
“If the shock persists, the Bank of England could be forced to raise interest rates back above 4%,” NIESR said.
Ed Cornforth, an economist at NIESR, said:
“The conflict in the Middle East will have material implications for the economic outlook. The Bank of England will have to contend with a shock to global energy prices, with the question of persistence hanging over their heads. This will cause problems for Rachel Reeves as financing costs increase, putting further pressure on an already precarious fiscal outlook”.
UK engineering firm John Wood Group has been fined more than £12m for publishing
inaccurate information in its financial results.
The Financial Conduct Authority has ruled that John Wood’s accounting judgements were “inappropriately influenced” by its desire to maintain previously stated financial results, after some projects performed poorly.
This caused the Aberdeen-based company to publish inaccurate information in its full-year 2022 and 2023 financial results and its half-year 2024 results, the FCA says.
John Wood is now being taken over by Sidara, in a deal that could complete on March 10.
US consumers may already be feeling the impact of the Iran war:
IFS: UK government may face demands for energy support
Heather Stewart
IFS director Helen Miller, presenting the thinktank’s take on yesterday’s Spring forecast, warns that if the Middle East conflict continues, the government will “undoubtedly” face a clamour to protect households from the worst of any resulting jump in energy bills – which it should think twice about caving in to.
“We have become accustomed in recent times to governments propping up household incomes when bad shocks come along,” she says.
“While there can obviously be benefits to this, protecting household incomes in this way is not costless. This kind of government support is a key reason that debt has been rising in recent years. And, partly because bad shocks keep coming along, and partly because we are aiming only to stabilise debt in the better times, debt keeps rising over time. That can’t go on for ever.”
Aside from highlighting the consequences of an extended conflict, Miller praised Rachel Reeves for making Tuesday’s statement such a non-event.
But Miller reiterated that to meet her self-imposed fiscal rules by the end of the parliament, the chancellor has pencilled in very tight spending plans in the run-up to the next general election.
Before then, Miller said, “the government will have to decide whether they do in fact think they have the ‘right plan’ or whether they want to raise more taxes so that they can top up spending plans further.”
Markets rally on report of Iran’s “secret outreach” to end conflict
European stock markets have suddenly turned higher, and the US dollar is weakening, following a report that Iranian operatives have made an offer to discuss terms for ending the war.
The New York Times is reporting that a day after the attacks began, operatives from Iran’s Ministry of Intelligence reached out indirectly to the C.I.A. with an offer to discuss terms for ending the conflict.
Officials briefed on the outreach are, the NYT says, “skeptical — at least in the short term — that either the Trump administration or Iran is really ready for an offramp”.
The NYT says:
The offer, which was made through another country’s spy agency, raises critical questions about whether any Iranian officials could put into place a cease-fire agreement with the Tehran government in chaos as its leaders are methodically picked off by Israeli strikes.
The offer was described on the condition of anonymity to The New York Times by Middle Eastern officials and officials from a Western country.
The report has driven the UK’s FTSE 100 share index up by 60 points, or 0.56%, with mining companies and airlines now leading the risers.
The pan-European Stoxx 600 share index is up 1.2%, and Wall Street futures are higher too.
The US dollar, which has been strengthening as investors have sought out a safe haven asset, is now down 0.25% today.
Oil has slipped back too, with Brent crude now up just 1.5% at $82.67 a barrel.
Goldman Sachs raise oil price forecasts
Goldman Sachs have hiked their forecast for the oil price in the second quarter of this year, in light of the Middle East conflict.
The bank has raised its second-quarter 2026 average price forecast for Brent crude oil by $10 to $76 per barrel and for US crude (WTI) by $9 to $71, Reuters reports.
[Brent crude is currently trading at just over $84/barrel, up from around $71/barrel a week ago]
In a research note, Goldman have also published estimates of how much the oil price might rise, if the strait of Hormuz is closed:
They estimate:
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$15 for a full one-month closure if there are no offsets (e.g., utilization of spare pipeline capacity, releases of strategic petroleum reserves)
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$12 in the event of a full one-month closure if all estimated spare pipeline capacity, 4 million barrels per day (mb/d), is used
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$10 for a full one-month closure if all estimated spare pipeline capacity is used and global strategic petroleum reserves are released for one month at a 2 mb/d pace
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$4 for a partial, one-month closure of 50% if all estimated spare pipeline capacity is used
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$1 for a partial, one-month closure of 25% if all estimated spare pipeline capacity is used
UK service sector firms keeping cutting jobs as costs rise
UK service sector companies continued to raise their prices, and cut staff numbers, last month – even before they’re hit by the energy shock.
The latest poll of purchasing managers at services firms has found that staffing numbers decreased for the seventeenth successive months in February, and that there was “another robust uplift in prices charged”.
Tim Moore, economics director at S&P Global Market Intelligence, says:
“February data pointed to a solid reduction in employment numbers, despite a sustained recovery in business activity. Job losses reflected ongoing efforts to focus on boosting productivity and mitigate sharply rising input costs.
Higher payroll costs were widely cited as leading to a strong pace of overall input cost inflation. Greater food prices and technology costs were also reported in February. This contributed to another robust increase in prices charged by service providers, with the pace of inflation little-changed from January’s five-month high.”
On the upside, though, service providers recorded a further upturn in business activity during the month.
The S&P Global UK Services Purchasing Managers’ Index (PMI) fell slightly to 53.9 last month from January’s five-month high of 54.0, but still a level suggesting the economy was expanding.
Although Rachel Reeves is (or possibly was) doing better against her fiscal rules, headroom is still relatively low in historic terms…
The Chancellor’s headroom remains below most of her predecessors.
This level of headroom still leave the public finances vulnerable to even historically average levels of economic volatility. pic.twitter.com/spJDv3bSim
— Resolution Foundation (@resfoundation) March 4, 2026
There were three sources of bad news in yesterday’s assessment of the UK economy from the Office of Budget Responsibility, reports Resolution Foundation’s research director James Smith.
1) Growth: the latest forecasts are, once again, weaker than those presented in November. For the decade to 2028, the OBR is forecasting the weakest growth in a century, if you ignore the Covid-19 pandemic and the second world war
2) Unemployment: the new projections show unemployment rising over 5.3%, which would be the highest in over a decade. Younger people are being hit hardest by this.
3) Migration: Net migration is coming in weaker than expected in November.
EU hits back at Trump’s threat against Spanish trade
Lisa O’Carroll
The EU has hit back at Donald Trump’s threats to halt all trade with Spain over its decision not to allow the US use its military bases for Iran bombing missions.
The EU said it expected the US president to “honour” its bloc-wide tariff deal concluded last year but hinted at the possibility of retaliatory measures if Trump did isolate Spain in a revenge move.
“The Commission will ensure that the interests of the European Union are fully protected. We stand in full solidarity with all Member States and all its citizens and, through our common trade policy, stand ready to act if necessary to safeguard EU interests,” said trade spokesperson Olof Gill, adding:
“Trade between the European Union and the United States is deeply integrated and mutually beneficial.
“Safeguarding this relationship, particularly at a time of global disruption, is more important than ever and clearly in the interest of both sides.
“The EU and the United States concluded a major trade deal last year. The European Commission expects the United States to fully honour the commitments” undertaken in the joint statement of last August.
The EU is continuing to honour its part of that deal, allow many US goods into the bloc tariff free, even though the US supreme court ruled Trump’s 15% tariffs on EU goods were illegal.
The Resolution Foundation are presenting the findings of their analysis of yesterday’s spring statement now – it’s being streamed here.
Resolution’s CEO, Ruth Curtice, starts by saying it was not a usual forecast, explaining:
We had no new policy announcements from the chancellor. We certainly had no rabbits out of the hat. We had no red box. We had no red book from the Treasury, and I can confirm that the Two Chairmen pub, where the Treasury tend to gather afterwards, was also much quieter than usual.
Curtice adds that the “quite surreal” statement from the chancellor was overshadowed by world events, but there are three reasons to care about it.
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This was an attempt from the Chancellor to shift how fiscal policy is done in the UK, moving to just one fiscal event in the autumn,
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The OBR’s latest assessment of the economy shows the underlying trends in the economy, even if things are about to change. And there was a “reasonable improvement” in the fiscal position.
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Then the Chancellor did spend some money. It’s just that she already told us she was going to spend it (including on Send support)
