The UK economy will barely grow next year if disruption to the Strait of Hormuz linked to the Iran war continues until the end of 2026, Treasury officials have briefed the Prime Minister.
Internal modelling from the Treasury suggests UK GDP (gross domestic product) could see growth as low as 0.3% in 2027, Government sources have said. Officials have said they routinely plan for all possible scenarios, with this growth projection linked to a more extreme situation.
Current economic backdrop
It comes amid a backdrop of modest growth in the UK economy, although the Office for National Statistics (ONS) is expected to reveal on Thursday that UK GDP saw no growth in June. The conflict in the Middle East has driven energy prices higher since February and pressed down on consumer sentiment.
On Wednesday, modelling shown to the Prime Minister and Chancellor, first reported by Bloomberg, said the UK economy could grow by 0.9% this year if there is no permanent peace deal between the US-Israeli forces and Iran. This would miss the 1.1% prediction from the Office for Budget Responsibility (OBR) earlier this year. The OBR had also predicted 1.6% GDP growth in 2027.
Inflation and growth forecasts
The more extreme scenario also indicated that Consumer Price Index (CPI) inflation could peak at 4.3% in the first quarter of next year, with disruption in the Strait of Hormuz likely to keep oil and gas prices elevated.
The forecasts come ahead of further key economic data for Andy Burnham. A consensus of economists predicted that the ONS will reveal on Thursday that the economy was flat in June but grew by 0.4% in the second quarter of this year. This would mean the economy has continued growing after a 0.6% rise in GDP for the first three months of 2026.
Rob Wood, chief UK economist for Pantheon Macroeconomics, said this would show “the big picture is that the economy has remained resilient to the hit from the war in Iran”.
Mixed signals from sectors
The services sector – the most dominant in the UK economy – strengthened in May, largely coming from professional services and scientific research and development. Furthermore, recent data has pointed to factories and manufacturing firms stockpiling in anticipation of supply shortages and price rises, which has helped keep growth elevated.
But a weaker picture may be emerging from June as the heatwaves bring mixed results for businesses and some industries come under increasing pressure, economists said. Mr Wood is expecting monthly GDP to dip by 0.1% in June, “reversing the 0.1% gain in May, as a sharp fall in construction activity drags on growth, while services and industrial production stagnate”.
Thomas Pugh, chief economist for RSM UK, said he was expecting the services industry to have been dragged down by a fall in hospitality activity, despite the Fifa World Cup kicking off in June. Mr Pugh said its own business surveys suggest “consumers were likely switching away from restaurants towards pubs to watch the World Cup, rather than increasing the total amount of spending”.
But he added: “There could still be a boost to activity in July, given the scorching weather and England reaching the semi-finals.”
Mr Pugh has a slightly more positive outlook for June, forecasting monthly GDP to have risen by 0.1%. “All told, we expect GDP to nudge up in June, helped by a big jump in erratic mining activity,” he said. “That will be enough to deliver 0.4% growth for Q2 (the second quarter), as strong momentum from Q1 (the first quarter) and consumers smoothing through higher inflation helped to support solid growth.”
A quarterly increase in GDP would be good news for Mr Burnham, who has said he wants to achieve “growth in every postcode” of the UK. He opened a new headquarters for the centre of Government in Manchester in late July, named No 10 North, where he is expected to work once each week as part of his move to push power out of Westminster.
