UK Economy Faces Recession Risk from Iran War

The UK economy could be pushed into recession by an ongoing Iran war that closes the Strait of Hormuz, according to a new report from EY. If the conflict continues and the key shipping route remains shut until early or mid-2027, GDP is expected to contract by 0.2% next year.

The report also warns that inflation could soar to 6.4% by the end of 2026 due to surging oil and energy prices. However, if the Strait of Hormuz reopens by the end of the third quarter of this year, growth is expected to remain fairly resilient at 0.9% in 2026 and 1.2% in 2027.

Interest rates are also expected to be held at 3.75% for the rest of this year before being cut twice in April and July next year, falling to 3.25% by the end of 2027. The report's base case forecast is that growth will remain fairly resilient if the Strait of Hormuz reopens.

However, 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.' He added: 'Ongoing disruption to global energy markets will now start to test this economic resilience.'