EY warns Iran war will determine UK growth; Strait of Hormuz closure risks 'worst possible sort of recession'

EY has raised its UK growth forecast to 0.9%, but the firm cautions that this outlook is precarious, hinging on the reopening of the Strait of Hormuz, which is vital for global oil and gas supplies.

The consultancy warns that the ongoing Iran war could significantly impact the UK economy, with potential scenarios predicting growth could slow to 0.5% this year and contract by 0.2% next year if energy prices remain volatile.

Peter Arnold, EY’s UK chief economist, stated, “If the Strait of Hormuz closes, 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.”⁸

The firm’s analysis indicates that prolonged energy price disruptions could lead to inflation soaring as high as 6.4%, creating a scenario of stagflation, where rising prices coincide with economic stagnation.²

The Bank of England may be forced to increase interest rates to combat inflation, which could further hinder economic growth.

As Chancellor John Healey noted, the government “can’t completely stop the squeeze” faced by households and businesses, highlighting the challenges ahead.

The situation remains fluid, with investors and policymakers watching closely for developments in the region, as any escalation could lead to the “worst possible sort of recession.”

The forward-looking purchasing managers indices (PMIs) for the UK economy serve as a useful warning light, with anything below 50 indicating contraction.

The number of vacancies in Britain fell in June, reflecting a nervous economy amid the ongoing conflict.