The UK economy is expected to shrink by 0.2 per cent in 2027 if the Strait of Hormuz remains closed until next spring, according to a recent economic forecast. Inflation is predicted to more than double to 6.4 per cent by the end of this year, with the economy experiencing two quarters of negative growth in the first six months of 2027.
Under the forecast's adverse scenario, the Strait stays shut until early or mid-2027, resulting in a significant impact on the UK's economy. Growth this year slows to 0.5 per cent before the economy contracts by 0.2 per cent in 2027. Inflation reaches 6.4 per cent, a level not seen since September 2023.
The forecast also suggests that unemployment will rise to 5.3 per cent by the end of the year before falling over the following two years. The UK economy has proven more resilient than expected this year, with oil prices having fallen back to pre-conflict levels, but ongoing disruption to global energy markets will now test this resilience.
According to the forecast, an extended closure of the Strait of Hormuz would raise inflation and could push the economy into contraction next year. The prolonged closure could also result in a more pronounced downturn if the Strait reopens in the coming months. Other forecasters have modelled a prolonged closure, with one suggesting it would take £35 billion out of UK output over two years and push inflation above 4 per cent.
The UK's labour market is under sustained pressure, with hiring demand falling across most parts of the economy. Posted wage growth is gradually cooling, making it challenging for graduates and younger workers to gain an initial foothold. The recruitment site Indeed reported that UK job postings have fallen by 13 per cent since the start of the year, with summer jobs at their lowest level in four years and graduate roles at their weakest point since the pandemic.
The UK economy is likely to become more concentrated on technology and services as construction continues to suffer due to rising project costs, persistent labour shortages, and weak productivity growth. Enhancing productivity in the sector will be critical if the UK is to deliver its infrastructure ambitions while supporting broader economic growth.
Despite the challenges, the UK economy has shown signs of resilience this year, with business and consumer confidence softening but remaining less severe than the shock triggered by the 2022 energy crisis. However, ongoing disruption to global energy markets will now test this resilience, and the prolonged closure of the Strait of Hormuz could push the economy into contraction next year.
