UK Economy Faces Recession Threat from Prolonged Iran War

A prolonged Iran war could push the UK economy into recession next year if the Strait of Hormuz remains closed, according to a report from EY. The economic outlook warns that gross domestic product (GDP) could slow sharply to 0.5% this year and contract by 0.2% in 2027 if the conflict is not resolved and the waterway remains shut until early or mid-2027.

In this adverse scenario, inflation could soar to 6.4% by the end of 2026 due to surging oil and energy prices, the report cautions. However, if the Strait reopens by the end of the third quarter of this year, EY's base case forecast suggests growth will remain fairly resilient.

According to Peter Arnold, EY UK chief economist, '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.'