The UK economy could contract next year if disruption to shipping through the Strait of Hormuz continues into 2027, according to a downside scenario published by EY.
The organisation’s latest UK Economic Outlook forecasts growth of 0.9% in 2026 and 1.2% in 2027 under its central case, which assumes that the strait reopens by the end of the third quarter, although tanker traffic remains subdued.
If the route stays closed until early or mid-2027, EY’s model indicates that growth could slow to 0.5% this year before the economy contracts by 0.2% next year.
The adverse scenario also shows inflation potentially reaching 6.4% by the end of 2026. Under the central forecast, inflation is expected to rise to 3.5% over the same period.
The Strait of Hormuz is one of the world’s most important energy routes. Disruption affects the movement of oil and liquefied natural gas, with consequences for wholesale prices, shipping availability, insurance, journey times, and industrial production.
EY’s central forecast is slightly stronger than its previous projection because the UK economy performed better than expected during the second quarter and oil prices initially returned towards pre-conflict levels more quickly than anticipated.
Renewed escalation and continuing restrictions on shipping have increased the risk that the energy shock lasts longer. A sustained closure would pass through the economy through household bills, transport expenses, business inputs, and weaker consumer spending.
The immediate exposure is not limited to companies purchasing oil or gas directly. Energy costs are embedded in food production, chemicals, manufacturing, construction materials, freight, hospitality, retail distribution, and data-centre operations.
Companies can absorb part of an increase through lower margins or greater efficiency, but prolonged pressure is more likely to result in higher prices. Businesses with fixed-price customer contracts face a particularly difficult period when input costs rise before they can renegotiate terms.
EY has downgraded its forecast for business investment, which it now expects to fall by 0.7% during 2026. That reduction would weaken the economy’s capacity to improve productivity and expand once immediate disruption eases.
The inflation risk would also complicate the Bank of England’s decisions. EY expects Bank Rate to remain at 3.75% for the rest of 2026 under its central case, followed by two quarter-point reductions during 2027.
A larger and more persistent rise in prices could delay those cuts or renew pressure for tighter policy. That would increase borrowing costs for businesses and households at the same time as real incomes and demand were being weakened by the energy shock.
The combination of weak growth and elevated inflation leaves policymakers with limited room to respond. Interest-rate reductions could support activity but risk embedding price pressure, while tighter monetary policy could intensify the slowdown.
Fiscal policy would face similar constraints. Support for household or business energy costs could limit immediate damage, but it would add to public borrowing unless matched by higher taxation or spending reductions elsewhere.
The effect would vary considerably between industries. Service and technology companies are generally less energy-intensive than heavy manufacturing, although they remain exposed through premises, travel, suppliers, and customers.
EY said information and communications technology, together with professional, scientific, and technical services, accounted for 70% of UK GDP growth between 2020 and 2026. Greater reliance on those sectors can support aggregate output, but it leaves industrial production and energy-intensive businesses carrying a disproportionate share of the disruption.
Construction is particularly exposed. EY estimates that the average cost of new construction projects has risen by more than 30% since 2019, while vacancies in the industry remained above pre-pandemic levels.
Businesses with international supply chains may need to reassess sourcing routes, stock levels, freight contracts, and hedging. Maintaining additional inventory can improve resilience, but it ties up cash and creates the risk of excess stock if conditions normalise quickly.
The downside case is a scenario rather than a prediction that recession is inevitable. Its severity depends on the duration of the closure, energy-market responses, alternative supply routes, government action, and the extent to which higher costs feed into wages and consumer prices.
The forecast nevertheless shows how a shipping bottleneck far from the UK can become a domestic growth and inflation shock. EY’s central case assumes that disruption eases within months; its downside model describes the consequences if that assumption fails.
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