Director Weekly  War in the Middle East exposes the UK’s economic vulnerability in the absence of a concrete plan for growth

The Chancellor’s speech was highly political – count the 16 sections of redacted political content in the Treasury’s transcript – but light on growth. She only said the words “business” or “businesses” three times; “employers”, not once.

The determination to ensure fiscal stability is welcome, yet is insufficient by itself to rebuild business confidence. And even by that yardstick there’s room for criticism: Reeves decided to spend half of the improvement in fiscal headroom, on SEND and local authorities.

Besides, while there were no new tax rises, the economy is increasingly feeling the effects of previous tax decisions. As the OBR highlights, the tax-to-GDP ratio is on track for a post-war high of 38.5% in 2030-31, while high marginal tax rates risk impacting incentives to work, save and invest.

The challenges ahead are clear. The OBR has downgraded its 2026 growth forecast to 1.1%, from 1.4% in November (moving it in line with the independent average). And there is real concern about rising unemployment, now expected to peak at 5.3% later this year. That risks undermining consumer confidence and weak demand.

Small wonder, perhaps, that the latest IoD Directors’ Economic Confidence Index –based on data gathered before the Spring Forecast – dropped back to -63 in February 2026, from -48 in January. Leaders’ confidence in their own organisations’ prospects also fell.

Given the fragility of confidence and the increasing risks to growth, it was disappointing that the Chancellor didn’t have more to say about growth. We’re calling for bolder and swifter action to reform the planning system, as well as steps to repair the damage done to the labour market and start bringing down businesses’ costs.

Of course, in all this, there was a vast elephant in the room: war in the Middle East. The timing of events meant that the forecasts presented on Tuesday do not take account of the fresh hostilities. Yet the potential economic impact could be enormous.

Among the immediate effects, we’ve seen gas prices doubling, and oil prices up by a third. We’re not in a post-Ukraine situation (at least, not yet): UK gas prices are currently about 20% of their peak in 2021-22, while oil is at about two-thirds of its 2022 peak. Consumers have some protection thanks to the energy price cap, but there is no such cushion for businesses. And because the UK’s energy mix is overweight in gas compared to some of our European counterparts, we’re more exposed to those price increases.

One important consequence is that inflation’s downward trend could well be interrupted – so further interest rate cuts have been pushed back. Market pricing for a rate cut in March has fallen from 90% to below 5%. Depending on how long the disruption lasts, we may see just one more cut this year, rather than two or three.

Anticipating the effects on the UK economy is difficult as the situation is so unpredictable. How long the conflict lasts, and how long shipping is unable to pass through the Strait of Hormuz, will be critical.

But the OBR published some analysis in March 2024 of a large-scale disruption scenario, involving an interruption to energy supplies comparable to the 1973 oil embargo. In that scenario, inflation is driven up by about 5.5% points, with the subsequent interest rate response leading quickly to a UK recession.

The reality is that the Chancellor’s much-vaunted stability is incredibly fragile. With a backdrop of weak growth and muted business optimism, new external shocks could hit the UK economy hard. And with UK public sector debt above 90%, debt interest payments above £100 billion and climbing, and UK borrowing costs the highest in the G7, there’s precious little space for the government to ease the pain. The Spring Forecast was a missed opportunity to refocus on growth.

Read more on the latest insights from the IoD Directors’ Economic Confidence Index here.