UK Economy Faces Contraction in 2027 if Strait of Hormuz Closure Persists, EY Warns

Britain's economy is likely to shrink in ​2027 if the Strait ​of Hormuz does not reopen to shipping before ​the middle of next year, forecasters at accountants EY warned on Monday.

EY slightly nudged up its growth forecast for this year to 0.8% ‌from 0.9%, ⁠on ⁠the basis that the Strait reopens by the end of September, and ​sees growth of 1.2% in 2027 on that basis.

"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," EY ​UK Chief Economist Peter Arnold said.

EY predicts ⁠that if the Strait of Hormuz remains shut until ​early to mid 2027, UK growth ​this year will slow to 0.5% and that the economy will shrink 0.2% in 2027

Inflation is likely to rise to 6.4% by the end of 2026 under that scenario, compared with a lower peak of 3.5% ‌this year if the Strait reopens in the next couple of months

Bank of England ​forecasts last ​week, under an ⁠adverse scenario where oil and gas prices remain 30%-60% higher than markets expect, still showed the economy growing by close to ​1% next year while quarterly inflation peaked at 4.5%

EY expects the BoE to keep interest rates on hold this year and then cut them next year from 3.75% to 3.25% with moves in April and July.