UBS warns that energy shocks could cloud the UK's outlook, despite the spring budget remaining stable

Investing.com - According to UBS economist Maelle Quillevere, the UK government’s spring budget released on Monday did not include any new policy announcements, with Chancellor Rachel Reeves confirming plans to make the autumn budget the main annual fiscal event.

The Office for Budget Responsibility updated its assumptions, expecting GDP growth to slow in 2026 due to weaker-than-expected performance at the end of last year, but then accelerate in the following two years. The report also indicated that inflation will return to target levels faster than previously forecasted.

The Office for Budget Responsibility expects fiscal space to increase by £2 billion, bringing the total to £24 billion, thanks to anticipated higher tax revenues.

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However, escalating conflict in Iran has led to rising energy prices and futures contracts, which could render the Office for Budget Responsibility’s forecasts outdated. UBS noted on Monday that, as a net importer of oil and natural gas, the UK economy remains vulnerable to such shocks.

UBS stated that the current situation is insufficient to support a return to double-digit inflation, especially if the conflict proves to be short-lived. Oil and natural gas prices are still well below their peaks this year, and prices could fall if the Strait of Hormuz reopens soon.

However, if the conflict persists for several months, overall inflation may begin to reflect higher energy costs.

UBS said that the temporary rise in energy prices is an inflationary development, and expects the Bank of England to overlook this factor in the short term. However, given the cautious stance the Bank has maintained throughout the easing cycle, if volatility continues, rate cuts in March and June could be delayed until later this year.

UBS noted that, against a backdrop of a weakening labor market, a reversal in the inflation downtrend could undermine economic support. Potential fiscal measures to address sustained energy price increases could also pose challenges, as the government might respond with subsidies and other support measures.

If this threatens the current fiscal trajectory, it could trigger market concerns, especially considering high sovereign debt levels and elevated government bond yields.

The UK market has already reflected these uncertainties, with volatility in UK bonds and the pound aligning with global risk sentiment. While UBS expects energy supply disruptions to be short-lived, market volatility is unlikely to subside in the near term.

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