Reeves promises to guide UK economy through Middle East conflict

UK treasurer flags uncertain global outlook amid war worries

Britain's Chancellor of the Exchequer Rachel Reeves attends a conversation with UK CEO of GroupM Karen Blackett, at a fringe meeting during the Labour Party conference in Liverpool, Britain, Sept 23, 2024. REUTERS/Phil Noble

British finance minister Rachel Reeves said she would steer the country's economy through the volatility unleashed by conflict in the Middle East, raising the prospect of closer ties with the European Union and promising stability for businesses.

In a budget update speech on Tuesday, Reeves acknowledged the scale of the economic risks facing Britain which is heavily exposed to the inflationary impact of an energy cost surge triggered by the US-Israeli war against Iran.

"This government has the right economic plan for our country, a plan that is even more important in a world that in the last few days has become yet more uncertain," she told lawmakers in a speech which contained no big policy surprises.

"It is incumbent on me and on this government to chart a course through that uncertainty, to secure our economy against shocks and protect families from the turbulence that we see beyond our borders."

PLANS AT RISK FROM GULF CONFLICT

Investors said Reeves, like other finance ministers around the world, remained at the mercy of events beyond her control.

"Geopolitics and the surge higher in energy prices are the only game in town and Chancellor Reeves’ Spring Statement will not be changing that," Matthew Amis, Investment Director at Aberdeen, said.

Britain's independent budget forecasters cut their economic growth projection for this year to 1.1 percent from a previous estimate of 1.4 percent. Growth was revised up slightly for both of the next two years to 1.6 percent, but that represented a pace barely half the average before the global financial crisis of 2007-08.

Furthermore, the Office for Budget Responsibility's forecasts were made before the recent turmoil in the Middle East which, the OBR warned, "could have very significant impacts on the global and UK economies."

It trimmed its forecast for inflation this year and said government borrowing between now and the end of the decade would be slightly lower than previously thought.

But it laid out the scale of the challenge that faced Reeves even before the recent Gulf turmoil, saying British public sector debt as a share of economic output was nearly double the advanced-economy average.

Elliott Jordan-Doak, senior UK economist at consultancy Pantheon Macroeconomics, said Britain's fiscal picture was more worrying than Reeves was admitting.

"The government has shown little ability to stick to its plans, racking up a raft of policy U-turns during its first two years in office," he said.

"We expect more will follow, with the local elections in May likely to serve as a catalyst for further domestic political turmoil, placing pressure on the leadership to ease fiscal policy."

That pressure has grown on Keir Starmer after his Labour Party was defeated in last week's election for a parliamentary seat.

PROMISE OF STABILITY IN TURBULENT TIMES

Reeves stressed the need for predictability in government policy as well as for investment in infrastructure, accusing the previous Conservative administration of allowing inflation to soar and interest rates to rise to a 15-year high.

"Stability is the single most important precondition for economic growth," she said.

Reeves is hoping that a period of policymaking stability - after the political turmoil triggered by the Brexit vote 10 years ago - will encourage businesses to invest.

Many employers contend that higher taxes and other costs imposed on them by Reeves are deterring them from hiring.

In her speech, she said she would set out proposals for closer post-Brexit trade ties with the European Union in the coming weeks and the government would set out reforms for reducing youth unemployment, which has risen sharply.

However, her economic programme faces big challenges.

Britain still has the highest inflation among the Group of Seven economies, which has prevented the Bank of England from cutting interest rates as quickly as other central banks.

Higher inflation also saddles the government with a bigger bill for its inflation-linked bonds which account for about a quarter of its debts.

Government bond yields surged for a second day in a row earlier on Tuesday as investors worried that this week's doubling of gas prices, if sustained, might prevent the BoE from cutting borrowing costs this year.

The leap in benchmark wholesale gas prices, which make up the largest single portion of Britain's domestic energy price cap, could push up the next pricing level for the July-to-September period if it is sustained.

Oil prices have risen 15 percent, leading to calls from some motoring groups for the government to reverse an end to the fuel duty freeze currently expected in September.

Britain's debt office said it would sell 252.1 billion pounds of government bonds in the next financial year, down from 303.7 billion pounds in the 2025/26 year which ends this month.