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.
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.
The bad news? A fresh energy price shock risks wiping out these gains.
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:
double quotation mark“The immediate economic outlook for Britain is highly uncertain, with yesterday’s forecasts already looking out of date, while the living standards picture for the rest of the Parliament is very lopsided.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
9am GMT: Resolution Foundation event on the spring forecast
9.00am GMT: eurozone services PMI for February
9.30am GMT: UK services PMI for February
10am GMT: Eurozone unemployment report for January
2.45pm GMT: US services PMI for February
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Updated at 02.25 EST
Key events
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Shipping through the strait of Hormuz still appears heavily disrupted today.
Reuters estimats that at least 200 ships, including oil and liquefied natural gas tankers as well as cargo ships, remained at anchor in open waters off the coast of major Gulf producers including Iraq, Saudi Arabia and Qatar, based on data from the MarineTraffic platform.
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Brent crude futures turn negative after report Iran sought talks with us to end war
Brent crude oil prices have also turned negative.
Brent crude has slipped back to $81.33 per barrel, down from almsot $84.50, following this morning’s report that Iran had reached out to the US about talks to end the conflict.
The US secretary of state for war, however, doesn’t sound like he’s ready to stop the conflict, judging by these Reuters snaps:
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The London stock market is continuing to claw back some of its losses from earlier this week.
The FTSE 100 share index is now up 84 points, or 0.8%, at 10,567 points.
Metlen Energy & Metals (+4.4%), the industrial and energy company, is the top riser, followed by copper producer Antofagasta (+3.9%).
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Gas giant QatarEnergy declare force majeure on LNG supplies
As feared, QatarEnergy has declared force majeure on shipments of liquefied natural gas.
The move, which frees QatarEnergy from existing supply contracts, comes after attacks on its production facilities on Monday that forced a pause to LNG production.
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Container ship reports strike by projectile in Strait of Hormuz
A container ship has reported being hit by a projectile in the Strait of Hormuz north of Oman on Wednesday, according to the UK Maritime Trade Operations.
The ship said the strike had caused a fire in its engine room, but no environmental impact had been reported, UKMTO added.
ShareLisa O’Carroll
Pedro Sanchez has risked the ire of the unpredictable Donald Trump with his firm stances that Spain is “not going to be complicit in something that is bad for the world”.
Trump’s threat to halt trade with Spain has prompted the EU to remind the US president that the deal they signed last year on tariffs still stands as a matter of good faith. If it is breach the bloc will react, it said on Wednesday hinting at retaliatory powers at its disposal.
It would be impossible for Trump to halt trade with any single country such is the global nature of supply chains.
But he does have, in his own words, a series of “powerful and obnoxious” tariff options that are outside the scope of the supreme court ruling 10 days ago which struck out his reciprocal tariffs.
He has constantly threatened, for example, sectoral tariffs on pharmaceuticals made in the EU and sold in the US, something that keeps Irish leaders awake at night.
Although Spain’s pharma sector is not as high profile politically as Ireland’s, it is also vulnerable.
In 2024 Spain exported $1.15bn pharmaceutical products in 2024 including medicines, sera and other blood products.
Trump could also attack a country’s legislative canon if he felt it was prejudicing American companies such as tech sector, something we know he feels strongly about.
He is currently invoking section 122 of the 1974 Trade Act to impose a global 10% tariff on foreign imports but pharma tariffs would be available to him under a different law, section 232 of the 1962 Trade Expansion Act.
He is currently threatening eight sectors under Section 232.
But he has three other laws he can draw on – here’s the explainer.
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Gas prices are dropping
UK and continental European gas prices have fallen back today – a relief for households, politicians and central bankers alike.
The UK’s month-ahead gas contract is down 10.5% today at 126p per therm, down from 141p per therm last night.
The benchmark Dutch contract is down almost 12% at €47.8 per Megawatt hour.
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Updated at 06.56 EST
Some UK lenders have paused plans for mortgage rate cuts, according to a financial information website, amid wider economic and global uncertainties as the conflict in the Middle East unfolds.
Moneyfacts said swap rates, which are used by lenders to price mortgages, have been rising in recent days, PA Media reports.
The website said it was aware that some lenders, which it did not name, had already reconsidered planned rate reductions.
Despite some lenders pausing plans to reduce rates further, figures from Moneyfacts indicated some mortgage rates were still heading in a general downward direction on Wednesday.
The average two-year fixed-rate homeowner mortgage rate on the market on Wednesday morning was 4.82%, down from 4.83% on Tuesday.
The average five-year fixed-rate homeowner mortgage rate on the market on Wednesday morning was 4.94%, falling slightly from 4.95% on Tuesday.
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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.
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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:
double quotation mark“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”.
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Updated at 06.21 EST
