UK Economy at Risk of Recession as Prolonged Iran War Threatens Energy Markets

A new report from EY warns that a prolonged Iran war could send the UK economy into recession next year. The report states that if the Strait of Hormuz remains closed until early or mid-2027, GDP could slow sharply to 0.5% this year and contract by 0.2% in 2027.

The report also predicts that inflation will soar to 6.4% by the end of 2026 due to surging oil and energy prices if the conflict continues.

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, with GDP expected to expand by 0.9% in 2026 and 1.2% in 2027.

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%.