UK Economy Faces Recession Threat Amid Strait of Hormuz Closure
Bank of England holds rates as oil prices surge, with growth outlook dependent on Middle East stability.
Image: Eddie Pollard / AI
Sarah Connor
The UK economy navigates a precarious path, balancing domestic resilience against escalating global geopolitical risks.
The Strait of Hormuz, a vital waterway through which a fifth of the world's oil and gas normally passes, remains a focal point of concern.
Britain’s economy could be sent into a recession next year if the crucial Strait of Hormuz remains closed into 2027, an EY report warns.
If the Middle East conflict is not resolved and the Strait of Hormuz 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, the EY report claims.
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 further suggests.
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.
Conversely, 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 upgraded its outlook to 0.9% expansion in 2026 and maintained its prediction for 1.2% growth in 2027 under this more optimistic scenario.
Peter Arnold noted, "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.
Yet, he cautioned, "Ongoing disruption to global energy markets will now start to test this economic resilience."
The Bank of England has signaled it stands ready to hike rates if the Iran war continues for many months and sends inflation rocketing.
The Bank suggested that CPI inflation 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.
An EY economic outlook report also 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% in 2026 before improving to 0.9% in 2027.