UK Economy Faces Contraction in 2027 if Strait of Hormuz Closure Persists, EY Warns
Quick Look
- EY forecasts the UK economy to shrink 0.2% in 2027 with 6.4% inflation if the Strait of Hormuz remains closed until mid-2027.
- Reopening the strait by September improves this year's growth forecast to 0.8%.
- Interest rate cuts by the Bank of England are expected next year.
AI-generated summary
Why It Matters
EY warns that the UK economy could shrink in 2027 and inflation rise significantly if the Strait of Hormuz remains closed until mid-next year, impacting growth forecasts.
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.
What to Watch
AI outlook — possibilities, not facts
UK economy will shrink 0.2% in 2027 if Strait of Hormuz remains shut until early to mid-2027.
Possible · Within months
Bank of England will keep interest rates on hold this year and cut them to 3.25% in April and July next year.
Likely · Within months
Open Questions
- What specific events could lead to the Strait of Hormuz remaining closed?
- What are the specific mechanisms of inflation increase due to the closure?
- What are the Bank of England's full adverse scenario details?
