UK Economy at Risk of Recession in 2027 Due to Strait Closure

The UK economy may face a recession in 2027 if the Strait of Hormuz remains closed due to an Iran war, according to a report by EY. The firm warns that GDP could slow sharply to 0.5% this year and contract by 0.2% next year under this scenario.

Ongoing disruption to global energy markets will test the UK economy's resilience, said Peter Arnold, EY UK Chief Economist. He noted that an extended closure of the Strait would raise inflation and could push the economy into contraction next year.

However, if the waterway reopens by the end of the third quarter this year, EY forecasts growth will remain fairly resilient. Under this scenario, the firm upgrades its UK economic outlook to 0.9% expansion this year and maintains its prediction for 1.2% growth in 2027.

The report also sees interest rates remaining at 3.75% for the rest of this year and then being cut twice in April and July next year, ending 2027 at 3.25%. This follows the Bank of England's recent decision to hold interest rates at 3.75%, but signal it stands ready to hike rates if the Iran war continues.