Britain’s economy could be sent into a recession next year if the crucial Strait of Hormuz remains closed into 2027, a new report has warned.
The latest EY economic outlook warns that if the Middle East conflict is not resolved and the vital waterway – through which a fifth of the world’s oil and gas is normally carried – remains shut until early or mid-2027, gross domestic product (GDP) could grow by just 0.5 per cent this year and contract by 0.2 per cent next year.
This adverse scenario could see inflation soar to 6.4 per cent by the end of 2026 due to surging oil and energy prices, the report cautions.
However, if the Strait of Hormuz reopens by the end of the third quarter of this year, EY’s base case forecast suggests growth will remain fairly resilient. EY has upgraded its outlook to 0.9 per cent expansion in 2026, having previously pencilled in 0.8 per cent, and maintains its prediction for 1.2 per cent growth in 2027.
The report also sees interest rates remaining at 3.75 per cent for the rest of 2026 and then being cut twice in April and July next year, ending 2027 at 3.25 per cent.
It follows the Bank of England’s latest rates decision last week, which saw it vote to hold at 3.75 per cent, but signal it stands ready to hike rates if the Iran war continues for many months and sends inflation rocketing.
The Bank suggested that Consumer Prices Index (CPI) inflation, which was recorded at 2.6 per cent in June, is likely to peak around 3.2 per cent later this year, before steadily easing back towards the Bank’s 2 per cent inflation target.
Peter Arnold, EY UK chief economist, said: “The UK economy has proved more resilient than many expected this year, prompting a modest upgrade to our growth forecast.
“Ongoing disruption to global energy markets will now start to test this economic resilience.
“If the Strait of Hormuz reopens in the coming months, we expect the UK to avoid a more pronounced downturn, but an extended closure into 2027 would raise inflation and could push the economy into contraction next year.”
The report cut its prediction for business investment to a fall of 0.7 per cent in 2026, down from a previous forecast for it to remain stable.
Household spending is also set to remain subdued as consumers face higher prices and delayed interest rate cuts, with consumer spending expected to grow by 0.3 per cent in 2026 before improving to 0.9 per cent in 2027.
