The UK could experience minimal economic growth in the next year if ongoing disruptions in the Strait of Hormuz persist through to the end of 2026. According to Treasury sources, new internal modelling presented to Prime Minister Andy Burnham and Chancellor John Healey predicts a potential growth rate of just 0.3% in 2027.
Economic Concerns Amid Middle East Conflict
The UK’s economy, initially strong earlier this year, has been impeded by the ongoing Iran conflict, which has led to increased oil and fuel prices and disrupted supply chains. The Treasury’s worst-case scenario involves the partial closure of the Strait of Hormuz for five months and no firm US-Iran peace agreement until the new year.
Forecasts and Official Projections
Economists are anticipating modest growth figures when data from April to June is released, with an expected 0.4% increase. Treasury projections estimate the UK will see 0.9% growth through 2026, slightly below the Office for Budget Responsibility’s (OBR) prediction of 1.1%. For 2027, a meagre 0.3% growth is projected, significantly less than the OBR’s 1.6% estimate.
Inflation and Policy Responses
Inflation is projected to peak at 4.3% in the first quarter of next year, rising from the current rate of 2.6%, which surpasses the Bank of England’s 2% target. In response, Burnham has committed to not raising income tax, VAT, or National Insurance contributions, adhering to the 2024 manifesto promises. Simultaneously, fiscal policies such as the removal of VAT on electricity bills have been introduced, though further interventions are expected to be discussed in the Budget on 28 October.
Budget Considerations and Government Strategy
Burnham emphasised on BBC’s Wake up to Money that recent measures are insufficient and hinted at further necessary support to address living costs. Chancellor Healey has prioritised the cost of living for the forthcoming Budget, though he insists on maintaining “strong fiscal discipline,” thus restraining governmental spending potential. The government is committed to balancing day-to-day spending with tax revenues by decade’s end, adhering to former Chancellor Rachel Reeves’ fiscal rules.
Reporting based on coverage first published by bbc.co.uk.