Burnham warned Iran war could hit UK growth next year
Treasury modelling warns UK GDP growth could slow to 0.3% in 2027 if disruption in the Strait of Hormuz persists.
Stock photo for illustration only, not from the actual event
- UK Treasury models suggest GDP growth could drop to 0.3% in 2027 if the Strait of Hormuz disruption continues until late 2026.
- Inflation is projected to peak at 4.3% in the first quarter of next year due to surging energy prices and supply chain shocks.
- Prime Minister Andy Burnham faces mounting pressure to deliver further cost-of-living relief in the October 28 Budget.
- The government maintains its commitment to fiscal discipline and promises no hikes to income tax, VAT, or National Insurance.
Prime Minister Andy Burnham and Chancellor John Healey have been warned that the British economy could experience near-stagnation next year if the ongoing disruption in the Strait of Hormuz stretches until the end of 2026. Internal Treasury modelling presented to government leaders indicates that UK GDP growth could plummet as low as 0.3 percent in 2027, as initially disclosed by Bloomberg, though government officials emphasize they routinely plan for all potential scenarios.
Despite a robust start to the year, the UK economy lost momentum as Middle East conflict disrupted businesses, drove up oil and fuel prices, and tangled global supply chains. Official figures measuring economic growth between April and June are scheduled for release on Thursday, with economists anticipating a modest 0.4 percent expansion for the three-month period.
Under a reasonable worst-case scenario where the Strait of Hormuz remains effectively closed for the next five months and a permanent US-Iran peace deal fails to materialize before the new year, Treasury models project 2026 growth at 0.9 percent—slightly below the Office for Budget Responsibility forecast of 1.1 percent issued in March. The economic outlook darkens significantly for 2027, with growth projected at just 0.3 percent compared to the OBR's earlier 1.6 percent forecast. Furthermore, inflation is modeled to peak at 4.3 percent during the first three months of next year, climbing well above the Bank of England's 2 percent target from the current 2.6 percent rate.
Stock photo for illustration only, not from the actual event
The Strait of Hormuz serves as a critical global chokepoint for international oil shipments, making any prolonged closure a direct catalyst for worldwide energy shocks. Spiking fuel and utility costs cascade through the entire economy, squeezing consumer purchasing power while inflating operational expenses for businesses and threatening broader macroeconomic stability.
These sobering projections intensify pressure on Burnham's administration to utilize the upcoming October 28 Budget to ease financial strain on households and businesses. Although Burnham has introduced policies during his first three weeks in office—such as removing VAT from domestic electricity bills and fast-tracking bans on subscription traps—he told the BBC's Wake up to Money that these steps are insufficient on their own, hinting that additional support is under consideration.
Chancellor Healey has been instructed to explore further cost-of-living measures for the Budget while simultaneously enforcing strict fiscal discipline to constrain government spending. The administration remains steadfast in adhering to its 2024 manifesto pledges not to raise income tax, VAT, or National Insurance, while also following fiscal rules established by former Chancellor Rachel Reeves to balance day-to-day spending with tax revenues by the end of the decade.
Source: BBC Business
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