Britain’s economy faces a significant risk of recession in 2027 if the ongoing conflict involving Iran leads to a prolonged closure of the Strait of Hormuz, according to a recent economic forecast. The strait is a critical maritime route through which approximately one-fifth of the world’s oil and gas supplies pass.

A new report from EY projects that gross domestic product (GDP) growth could slow to 0.5 percent in 2026 and contract by 0.2 percent the following year if the waterway remains closed into early or mid-2027 due to the unresolved Middle East conflict. The report warns that such a scenario would likely drive inflation up to 6.4 percent by the end of 2026 as oil and energy prices surge.

Conversely, if the Strait of Hormuz reopens by the end of the third quarter this year, EY’s base case forecast anticipates a more resilient economy. Under this scenario, GDP growth is expected to improve to 0.9 percent in 2026, up from an earlier estimate of 0.8 percent, with continued growth of 1.2 percent projected for 2027.

The outlook for interest rates assumes they will remain steady at 3.75 percent through the remainder of 2026. EY predicts two rate cuts in 2027, in April and July, reducing the rate to 3.25 percent by year-end. This forecast aligns with the Bank of England’s recent decision to maintain the base rate at 3.75 percent. However, the Bank indicated it is prepared to raise rates again if the Iran conflict persists and inflation rises sharply.

Consumer price inflation, measured by the Consumer Prices Index (CPI), was recorded at 2.6 percent in June. The Bank of England expects inflation to peak around 3.2 percent later in 2026 before gradually declining toward the 2 percent target. Meanwhile, household spending is expected to remain sluggish due to higher prices and postponed rate cuts, with consumer expenditure projected to grow by 0.3 percent next year and strengthening to 0.9 percent in 2027.

UK businesses are also feeling the economic strain. Retail giant Next, often seen as a barometer for the UK high street, reported a rise in costs related to the Iran conflict. The company revised its estimated additional expenses from £15 million in March to around £47 million in a recent trading update. Next is set to release updated financial results on Wednesday.

The deteriorating situation follows the collapse of a US-mediated interim ceasefire with Iran in May, which has led to renewed military activity in the region, further fueling economic uncertainty for the UK and global markets.