The UK economy could face a severe slowdown next year if disruption caused by the war between Iran and the United States keeps the Strait of Hormuz effectively closed, according to a Treasury forecast.
Officials have reportedly warned that economic growth could fall to just 0.3 per cent in 2027 if the vital shipping route remains disrupted through the end of this year.
Such a performance would represent the weakest annual growth since 2023, when Britain was still dealing with the economic fallout of Russia’s invasion of Ukraine and the resulting cost-of-living crisis.
The projection is also dramatically below the 1.6 per cent growth currently forecast by the Office for Budget Responsibility.
Inflation Could Surge Above Four Per Cent
The Treasury briefing, reported by Bloomberg, also points to renewed inflationary pressure.
Consumer price inflation could climb from its current level of 2.6 per cent to 4.3 per cent during the first quarter of 2027 if the conflict continues to disrupt energy supplies and global trade.
Such an increase would put further pressure on household finances, potentially reversing some of the progress made in bringing inflation under control.
Higher energy and transport costs could also feed into the prices of food and other essential goods, making it more difficult for households to recover from years of elevated living costs.
Government Faces Fresh Budget Pressure
The warnings present a difficult economic backdrop for Andy Burnham and Chancellor John Healey as the Government prepares for its October Budget.
Analysts have already suggested that ministers could be forced to consider as much as £25 billion in tax increases to support planned spending.
A weaker economy would make that challenge considerably harder.
If growth deteriorates, government tax receipts could decline while demand for welfare support increases.
That combination would create another significant strain on the public finances and potentially leave ministers facing difficult decisions over taxation and spending.
Latest Figures Show Momentum Is Already Weakening
The Treasury warning comes as official figures show that the pace of economic expansion has already slowed.
UK gross domestic product grew by 0.4 per cent in the second quarter, down from 0.6 per cent during the first three months of the year.
The prospect of another slowdown has raised concerns about the possibility of stagflation, where weak economic growth occurs alongside persistently high inflation.
Such an outcome would be particularly damaging because policymakers would face pressure to support economic activity while simultaneously trying to prevent prices from accelerating further.
Heatwaves Add to Britain’s Economic Problems
The economic pressure is not coming exclusively from the conflict in the Middle East.
Britain’s repeated heatwaves are also being blamed for weakening productivity and damaging parts of the economy.
Extreme temperatures have affected workplace output, reduced high street activity and contributed to drought conditions that are putting pressure on agricultural production.
Martin Beck, an economist at WPI Strategy, estimated that unusually hot weather has already cost the UK economy approximately £3 billion.
Green think tank Verdant has put the economic impact even higher, at around £4.4 billion.
The agricultural consequences could become particularly serious if prolonged drought damages harvests and contributes to shortages or higher food prices.
Strait of Hormuz Becomes Critical Economic Flashpoint
Energy markets remain at the centre of the economic concerns surrounding the conflict.
Oil prices were hovering close to $90 a barrel, reflecting continued uncertainty over shipments through the Strait of Hormuz.
Before the war, roughly one-fifth of the world’s oil and gas supplies passed through the strategically important waterway.
Any prolonged disruption could therefore have consequences far beyond the countries directly involved in the conflict, affecting energy prices, transportation costs, industrial production and household bills across the global economy.
The International Energy Agency has also warned that global oil inventories are being depleted rapidly as the conflict continues.
Britain Faces a Difficult Economic Balancing Act
The combination of geopolitical instability, weaker growth, elevated inflation and climate-related disruption leaves the Government facing a particularly challenging economic environment.
A prolonged energy shock could squeeze consumers and businesses at the same time as weaker economic activity reduces the Government’s ability to raise revenue.
For ministers, the emerging threat is therefore not simply slower growth.
A prolonged conflict could create a combination of higher prices, weaker output and worsening pressure on public finances, leaving the Government with fewer options ahead of a crucial Budget.
