Overview
The Office for Budget Responsibility (OBR) has updated its spring forecast: the UK unemployment rate is now projected to rise from 4.75% in 2025 to a peak of 5.3% in 2026, higher than the 4.9% peak expected in November. The OBR also nudges the 2027 unemployment projection to 4.9% (previously 4.6%) and expects unemployment to fall to 4.1% by 2030.
At the same time the fiscal watchdog trims its inflation outlook: CPI is now forecast to reach 2.3% in 2026, down from the 2.5% projection in November, with inflation returning to 2.0% per year from 2027. The OBR notes that these forecasts were finalised before the Middle East conflict intensified and that geopolitical shocks could push outcomes in either direction.
Key data points (quick reference)
- Unemployment: 4.75% (2025) -> 5.3% peak (2026) -> 4.9% (2027)
- Long-run unemployment: 4.1% by 2030
- CPI inflation: 2.3% (2026), 2.0% per year from 2027
- GDP growth average: 1.5% from next year (OBR central assumption)
- Public sector net borrowing: 4.3% of GDP (current year) -> 3.6% -> 2.9% -> 2.5% -> 1.8% (2029-30)
- Debt: stabilising near 95% of GDP over the forecast horizon
- Headroom on fiscal rules: stability rule headroom up from £21.7bn to £23.6bn; investment-rule headroom at £27.1bn
- External risk factors in play: Brent crude at an 18‑month high; UK gas contracts at three‑year highs; heightened Middle East tensions
Labour market outlook: what the numbers mean
The central forecast that unemployment will peak at 5.3% in 2026 signals a material loosening of the labour market from recent levels. The OBR highlights that "labour market weakness still appears to be driven primarily by entrants into the labour force struggling to find work amid subdued hiring demand." That pattern typically reflects a combination of weak demand for labour, slower GDP growth near potential, and structural frictions for new entrants.
For fixed‑income and equity traders, a higher projected unemployment peak implies:
- Potential downward pressure on wage inflation and services CPI over the medium term.
- Reduced probability of immediate policy tightening by the Bank of England if slack widens materially.
- Greater sensitivity of consumer‑facing sectors to demand weakness.
Fiscal and macro outlook
The fiscal profile remains on a gradual consolidation path in the OBR central case: public sector borrowing falls steadily to about 1.8% of GDP by 2029-30, which the forecast states would stabilise debt around 95% of GDP. The chancellor frames this path as "borrowing down, headroom up," noting headroom increases against fiscal rules.
GDP per person (per capita) growth is cited as improving: projected growth of 5.6% over the course of the parliament. GDP growth averages are modestly recovered (1.5% pa in the central path), leaving the economy with limited spare capacity and a continued sensitivity to energy and geopolitical shocks.
Inflation outlook and market reaction
The OBR trims its 2026 CPI projection to 2.3% from the November 2.5% estimate while keeping a 2.0% run‑rate from 2027. However, the OBR explicitly warns the forecast was finalised prior to renewed conflict in the Middle East; energy price spikes since then (Brent at an 18‑month high, UK gas contracts at three‑year highs) could push inflation outcomes above the published baseline.
Market signals noted alongside the forecast include:
- UK bond yields jumping on inflation risk repricing.
- FTSE 100 weakness and broader equity pressure across European markets.
- Reduced odds of near‑term Bank of England rate cuts as markets reassess inflation trajectories.
Political and policy context
Fiscal policy is being presented as cautious: headroom against fiscal rules has increased modestly, and the chancellor emphasises a preference for avoiding reversion to tight austerity or heavy borrowing. Politically, opposition voices characterise the plan as harmful to growth, while the chancellor argues the plan supports working households and medium‑term stability.
Three strategic priorities signalled for upcoming policy action are:
- Strengthening international trade relationships and alliances (UK–EU, UK–US, UK–India referenced as priorities)
- Backing innovation and leveraging AI to boost productivity
- Rebalancing economic geography to spread growth and opportunity across regions
Risks and scenarios for traders and analysts
High‑impact risk factors highlighted in the update include:
- Geopolitical escalation in the Middle East that sustains energy price inflation
- Domestic demand weakening faster than the central forecast, widening slack and depressing wages
- Faster‑than‑expected global growth that could reflate inflation and push yields higher
Scenario planning suggestions:
- Fixed‑income desks: model a 25–75 basis‑point swing in gilt yields under energy‑shock scenarios; reassess duration exposure.
- Equity investors: stress‑test consumer discretionary and energy exposure; consider defensive rotation if unemployment surprises higher.
- Macro strategists: monitor labour force participation and hiring metrics for signs that entrants are failing to secure work, as flagged by the OBR.
Bottom line for professional investors
The OBR spring update shifts the baseline modestly toward higher unemployment and slightly lower measured inflation for 2026, while flagging substantial geopolitical upside and downside risks. For investors, the combination of higher projected unemployment, elevated energy prices, and fiscal consolidation implies a need to balance duration risk, sectoral exposure, and scenario‑driven stress testing. Headline numbers to watch in the coming quarters: unemployment trajectory to 5.3% in 2026, CPI around 2.3% in 2026, and public sector borrowing falling toward 1.8% of GDP by 2029‑30.
