Britain’s economy could be sent into a recession next year if the crucial Strait of Hormuz remains closed into 2027 amid a prolonged Iran war, according to a report.
The latest EY economic outlook warned that gross domestic product (GDP) could slow sharply to 0.5% this year and contract by 0.2% next year 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.
This adverse scenario could see inflation soar to 6.4% by the end of 2026 due to surging oil and energy prices, the report cautioned.
But 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, with EY upgrading its outlook to 0.9% expansion in 2026 and maintaining its prediction for 1.2% growth in 2027.
It had previously pencilled in growth of 0.8% in 2026.
The report also sees interest rates remaining at 3.75% for the rest of 2026 and then being cut twice in April and July next year, ending 2027 at 3.25%.
It follows the Bank of England’s latest rates decision last week, which saw it vote for a hold at 3.75%, 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% in June – is likely to peak around 3.2% later this year, before steadily easing back towards the Bank’s 2% 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% 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% in 2026 before improving to 0.9% in 2027.
