UK recession risk rises if Strait of Hormuz stays closed until 2027, EY warns

The UK economy could tip into recession next year if the Strait of Hormuz remains closed into 2027, a scenario that would sharply reverse recent resilience and test the Bank of England’s rate stance, according to a new EY economic outlook.

The report, released this week, warns that an extended closure of the strategic waterway — through which a fifth of the world’s oil and gas normally flows — would cut gross domestic product growth to just 0.5% in 2026, followed by a 0.2% contraction in 2027. That adverse scenario assumes the strait stays shut until early or mid-2027 amid a prolonged war in Iran.

Under that same stressed path, inflation would soar to 6.4% by the end of 2026, driven by surging oil and energy prices, EY cautioned. That would be more than double the current inflation rate and far above the Bank of England’s 2% target.

In contrast, if the Strait of Hormuz reopens by the end of the third quarter of 2026, EY’s base case shows the UK avoiding a downturn. The firm upgraded its 2026 growth forecast to 0.9% from 0.8%, and maintained its 2027 prediction of 1.2% expansion. The base case assumes the conflict is resolved in the coming months.

**Interest rates and the Bank of England**

The report sees the Bank of England holding its key rate at 3.75% for the rest of 2026, then cutting twice in April and July 2027, bringing the rate to 3.25% by year-end. That path assumes inflation eases as the strait reopens.

The Bank itself last week voted to hold at 3.75%, but signalled it stands ready to hike rates if the Iran war drags on for many months and sends inflation rocketing. The Bank projected that Consumer Prices Index inflation — which stood at 2.6% in June — will peak around 3.2% later this year before gradually falling back toward the 2% target.

**Business investment and household spending hit**

EY cut its forecast for business investment, now expecting a 0.7% fall in 2026, versus a previous call for stable investment. Household spending is also set to remain subdued as consumers face higher prices and delayed interest rate cuts. Consumer spending is expected to grow by just 0.3% in 2026 before improving to 0.9% in 2027.

Peter Arnold, EY UK chief economist, said the economy had been more resilient than expected this year, prompting a modest upgrade to the growth forecast. “Ongoing disruption to global energy markets will now start to test this economic resilience,” he added. “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.”

The warning reflects the deepening geo-economic risk from the Iran conflict, which has already disrupted global energy supply chains. The Strait of Hormuz, a narrow passage between the Persian Gulf and the Gulf of Oman, is the world’s most important oil chokepoint. Any prolonged closure would hit the UK economy through higher energy costs, weaker trade, and a squeeze on household and corporate spending.

For now, the base case remains one of modest growth. But the EY report makes clear that the outcome hinges on whether the waterway reopens on schedule — and that a prolonged closure would derail the UK’s recovery.