David Smith, Economics Editor of the Sunday Times, addressed an audience of Eton Bridge Partners’ clients and guests at the Royal College of Surgeons in London’s Lincoln’s Inn Fields on March 4, 2026.

As well as the Iran war, there was the Chancellor’s Spring Statement to reflect upon. Rachel Reeves had made her statement to the House of Commons on the previous day, March 3rd, and while there were no new policy announcements, the new official forecast from the Office for Budget Responsibility (OBR) was nevertheless interesting.

Smith began by saying that the timing of the Iran war, which had pushed up energy costs significantly – oil and natural gas – was unfortunate from an economic perspective. Though there is a lot of gloom around, particularly on unemployment and youth unemployment, the economy appeared to have started the year quite strongly. Retail sales rose strongly in January and the monthly purchasing managers’ indices (PMIs) for both services and manufacturing had been strong in both January and February, suggesting a first-quarter bounce in gross domestic product (GDP), after a weak end to 2025.

Some of that bounce reflects relief that the November budget last year was not worse. There were tax increases, but most of them were delayed. But there was also a sense that with interest rates and inflation coming down, there was scope for improvement in 2026.

This was the theme of Reeves’ take on the latest OBR forecast, in her response to it on March 3rd. She struck an upbeat tone, in spite of clear concerns about the impact of the Iran war and wider instability in the Middle East, saying in a message intended for her own backbenchers, as well as the public and the markets, that at this time of great uncertainty, domestic political stability is more important than ever.

Perhaps the most encouraging aspect of the new OBR forecast, apart from its expectation that inflation will soon return to the 2 per cent official target, was that the public finances finally appear to be on the mend. The OBR revised down its public borrowing forecast for this year by £5.5 billion and suggested that the budget deficit is breaking out of the post-pandemic pattern, in which it had been stuck at 5 per cent, of GDP (gross domestic product). This year’s figure will be just over 4 per cent, if the OBR is right, with further falls due in future years.

This assessment was accompanied by another helpful and unusual development. The OBR decided that the “headroom” the chancellor had provided herself with to meet her fiscal rules, just under £22 billion in November, was now nearer to £24 billion. This offered the hope that this year would differ from the two previous years in a very important respect for business. The chancellor has given herself room to avoid further tax increases in the autumn budget, the speculation and reality of which has damaged the economy over the past two years. Smith said there should be no need for further tax hikes, and that should be regarded as good news.

Will all this be blown off course by events in the Middle East? It was early days, but other things being equal, if sustained, the Iran war was likely to mean higher inflation and slower growth. The benign picture set out by the Bank of England in its February monetary policy report and endorsed by the OBR – of lower inflation resulting in further interest rate cuts – was under threat from the war. We learned during the Ukraine crisis to take note of the market price for natural gas, very important for the UK, and arguably more important than oil prices. It all depended on how long the disruption persists.

Though there were signs of improvement in the UK economy in the first two months of the year, worries remain. Much of the rise in the unemployment rate, and the increase in the 16-24 age-group unemployment rate to more than 16 per cent, can be explained by a fall in inactivity, Smith noted. This is when people who are not available for work, and outside the workforce, make themselves available for work. At a time when many employers are not recruiting, because of uncertainty and higher employment costs, including the employment rights’ bill and the increase in employers’ National Insurance (NI), the result is higher unemployment. Rising unemployment is a blot on the economy, and another reason why we need the economy’s apparent good start to 2026 to be maintained, despite the new uncertainty.

There was a lively discussion, with many good questions from the audience. One topic covered whether Donald Trump was a greater threat to global stability and the world economy, with tariffs and now the Iran war, than China and Russia. In the short term he probably was, said Smith, but in the long run, we had to learn how to counter the Chinese threat while simultaneously trading with the world’s second-largest economy, which may soon become the largest.

Another topic brought up referenced the risks from the disintegration of traditional party politics. On this, the Starmer-Reeves combination was probably the most stable, as far as financial markets were concerned, of all the alternatives available in the Labour Party. Markets were not yet ready for the prospect of either Reform UK or the Greens being in or close to government. In that respect, it was encouraging that the debate and battle over the November budget was between Labour and the Conservatives. The question was whether voters would gravitate back to the mainstream parties over time.

As always, a huge thank you to David for joining us. We appreciate you taking the time to share your latest insights and answering our questions on the current UK economy.

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