OBR Cuts UK 2027 Growth Forecast to 1% as Energy and Interest Costs Bite
Key Facts
The Office for Budget Responsibility cut its forecast for UK real GDP growth in 2027 to 1%, about half a percentage point below its estimate in March. It attributed the slowdown to higher energy prices being passed on to consumers and businesses, alongside the pressure of elevated interest rates on the economy. The new forecast puts the economy on a weaker path next year, as the energy shock feeds through to inflation, production costs and transport. The Treasury said the conflict in the Middle East had directly affected inflation forecasts through higher energy prices, and indirectly through increased production and transport costs. The OBR expects the conflict's secondary inflationary effects to be limited.
The OBR forecasts consumer price inflation will peak at 3.8% in the first quarter of 2027, before returning to the 2% target by the third quarter of 2028. Inflation rose to 3.5% in September, and the Treasury said most of the increase came from conflict-driven motor fuel inflation. This trajectory reflects the pass-through of the energy shock to prices, with its effects expected to persist before inflation gradually eases towards the target. The timing matters because the projected peak coincides with slower growth in 2027. The return to target is not expected before the third quarter of 2028.
For households, the OBR expects real disposable income per person to fall 0.6% in fiscal year 2026-27. Thereafter, it is expected to grow by an average of 0.6% a year over the rest of the forecast period. The path points to an initial loss of purchasing power before income growth resumes, as inflation is expected to remain elevated until peaking in early 2027. Household income is affected by higher energy prices, while rising interest rates weigh on economic activity. The income figures remain tied to the forecast horizon cited by the OBR, rather than a single monthly reading.
On public finances, the OBR forecast that the additional cost of government interest on debt would average 11 billion pounds sterling a year more than in its March forecast, before budget measures. The UK Debt Management Office announced after the budget that it would increase gilt issuance by 4.4 billion pounds sterling during fiscal year 2026-27, alongside an additional 3 billion pounds of short-term Treasury bills. Reuters said the revised plan was broadly in line with market expectations. Higher debt-servicing costs add to the pressures facing public finances, alongside rising energy costs and the downgrade to growth. The increase in interest costs relates to the borrowing forecast before budget measures, while the issuance figures concern the revised financing plan.
Market moves after the budget were limited: the yield on 10-year UK government bonds fell 2.1 basis points to 5.321% on 29 October, and sterling declined 0.1% to 1.3291 dollars. Laleh Acker, an analyst at eToro, said the muted moves in sterling and bonds indicated that the budget had largely met expectations. She added that the response reassured investors without materially changing the outlook for Britain. In his budget speech, Chancellor John Healey said the UK economy had been the fastest growing in the G7 alongside the United States in the first half of the year. Healey presented this as evidence of the economy's resilience despite challenges, while asset moves remained limited after the budget announcement.
The energy path remains a key factor in the outlook: real GDP growth could be 0.5 percentage points higher in 2027, and borrowing could fall by 12 billion pounds sterling in 2027-28, if energy prices follow a lower path than assumed in the central forecast. The next monetary policy step is the Bank of England Monetary Policy Committee meeting on 5 November 2026, when the meeting summary and minutes and the Monetary Policy Report will be published. The meeting comes amid expectations that inflation will peak in the first quarter of 2027, with energy and interest rates continuing to affect growth estimates. The comparison between the central path and the lower energy-price scenario will remain tied to how energy costs develop. Attention will also turn to the Bank of England's decision and its assessment of inflation and economic activity.