The UK economy would shrink by 0.2 per cent in 2027 if the Strait of Hormuz remains closed until next spring, with inflation more than doubling to 6.4 per cent by the end of this year, according to EY’s latest UK Economic Outlook.
The forecast sets out two scenarios for the waterway, which normally carries 20 per cent of the world’s oil and gas.
Under EY’s baseline, in which the Strait reopens by the end of September, inflation rises from its current level of 2.6 per cent to 3.5 per cent. The economy grows by 0.9 per cent in 2026 and by 1.2 per cent in 2027, and the Bank of England cuts interest rates twice next year, to 3.25 per cent.
Under the adverse scenario, in which the Strait stays shut until early or mid-2027, meaning it would have been closed for at least a year since the war with Iran began, inflation reaches 6.4 per cent. Growth this year slows to 0.5 per cent before the economy contracts by 0.2 per cent in 2027, including two quarters of negative growth in the first six months.
Inflation was last above that level in September 2023, when it was 6.7 per cent, having peaked at 11.1 per cent the year before. It fell to 2.6 per cent in June, the lowest reading since March 2025.
EY expects unemployment to rise to 5.3 per cent by the end of the year before falling over the following two years.
Peter Arnold, EY’s UK chief economist, said: “The UK economy has proved more resilient than many expected this year.
“Oil prices had started to fall back to pre-conflict levels and, while business and consumer confidence have softened, this decline remains less severe than the shock triggered by the 2022 energy crisis.
“Ongoing disruption to global energy markets will now start to test this economic resilience.
“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.”
Donald Trump, the US President, said on Sunday that he had held off on new air strikes against Iran after the “perimeters” of a deal had been agreed, including an immediate reopening of the Strait. Iran has not acknowledged any such agreement.
Escalating tensions recently took oil to $100 (£75) a barrel for the first time since May, with petrol reaching 160p a litre, its highest level since the fighting began in February.
Other forecasters have modelled a prolonged closure. In April, the National Institute of Economic and Social Research said a sustained blockade would take £35 billion out of UK output over two years and push inflation above 4 per cent.
Andy Burnham, who became Prime Minister in July, has made tackling the cost of living a priority for his first weeks in office.
Arnold said the economy was likely to become more concentrated on technology and services as construction continued to suffer.
“Rising project costs, persistent labour shortages and weak productivity growth risk constraining the delivery of major infrastructure projects at a time when demand remains high,” he said.
“Enhancing productivity in the sector will be critical if the UK is to deliver its infrastructure ambitions while supporting broader economic growth.”
EY’s forecasts were published alongside figures from the recruitment site Indeed showing that UK job postings have fallen by 13 per cent since the start of the year. Summer jobs were at their lowest level in four years and graduate roles at their weakest point since the pandemic. Posted wage growth was 3.9 per cent, the lowest annual rate since February 2022.
Indeed said 9.4 per cent of roles, almost one in 10, mentioned AI in the job posting.
Jack Kennedy, of Indeed, said: “The UK’s labour market is under sustained pressure. Hiring demand is falling across most parts of the economy, while posted wage growth is gradually cooling.
“That is particularly challenging for graduates and younger workers, who are competing for fewer opportunities to gain an initial foothold.”
