Big Four consultancy EY has raised its UK growth forecast to 0.9 per cent this year, offering a cautiously optimistic outlook for the British economy.
However, EY economists have warned that this baseline projection depends heavily on the Strait of Hormuz reopening to allow the free flow of global energy supplies.
The strait carries around a fifth of global oil and gas supplies, alongside critical goods leaving the Gulf region, making it a pivotal chokepoint for the world economy.
EY analysts cautioned that “prolonged energy price disruption may halt growth in 2027” if the conflict between Iran and the United States continues to escalate.
In an adverse scenario where disruption persists into mid-2027, EY projected UK growth would slow to just 0.5 per cent this year and contract by 0.2 per cent the following year.
Inflation poses an equally alarming risk, with EY’s worst-case scenario suggesting price rises could surge to 6.4 per cent within a matter of months.
Even under the baseline forecast, inflation is set to reach approximately 3.5 per cent by the end of the year, adding further pressure on households and businesses.
President Trump hinted on Sunday that a new peace deal with Iran was close to agreement, raising hopes that the global economy might yet avoid the most damaging outcomes of the conflict.
Despite those signals, investors and policymakers may treat any declarations by Trump or Iranian leaders with scepticism, given that a previous Memorandum of Understanding quickly broke down as strikes by Iran and the US shattered a 60-day ceasefire.
The forecasts cast a shadow over Andy Burnham’s optimism for the UK economy and his drive to ease cost-of-living pressures for businesses and households alike.
Chancellor John Healey acknowledged on Sunday that the government “can’t completely stop the squeeze” faced by businesses and families over the coming months.
Peter Arnold, EY’s chief economist in the UK, said recent volatility in oil and gas prices would once again “test” the country’s resilience to shocks, even as growth had beaten expectations in the first half of the year.
Arnold noted that the UK would rely on technology and some business services to drive growth, while construction remained a “concern” due to rising costs that have climbed more than 30 per cent since 2019.
Vacancies across the construction sector are the only private sector industry to have remained above pre-pandemic levels, as job postings have fallen across manufacturing and services more broadly.
EY’s analysis also pointed to agentic AI as a potential driver of productivity improvements across the wider economy in the years ahead.