Treasury modelling shown to Prime Minister Andy Burnham and Chancellor John Healey projects UK growth of just 0.3% in 2027 if disruption in the Strait of Hormuz continues through 2026. The scenario also has inflation peaking at 4.3% in early 2027, above the Bank of England's 2% target.
Treasury officials have presented Burnham and Healey with a reasonable worst-case scenario in which the Strait of Hormuz stays effectively closed for the next five months, with no permanent US-Iran peace deal reached until the new year. Under that scenario, the UK economy would grow 0.9% over 2026 — slightly below the Office for Budget Responsibility's 1.1% forecast made in March.
The outlook for 2027 is weaker still. The modelling points to growth of just 0.3% next year, far under the OBR's 1.6% projection.
Inflation would also climb under the scenario, peaking at 4.3% in the first three months of 2027. It currently stands at 2.6%, just above the Bank of England's 2% target. Government officials say they routinely plan for all possible scenarios.
War in the Middle East has already slowed growth
The UK economy started the year strongly, but growth then faltered as the conflict in the Middle East pushed up oil and fuel prices and disrupted supply chains. Official figures due Thursday will show how much the economy grew between April and June, with economists expecting growth of 0.4% for the quarter.
Pressure builds ahead of the Budget
The weak outlook adds pressure on Burnham and Healey to ease the burden on households and businesses at the Budget on October 28. Since taking office three weeks ago, Burnham has removed VAT from domestic electricity bills and brought forward an end to subscription traps. But this week he told the BBC's Wake Up to Money that, according to BBC News, those steps are "not enough on their own", hinting at further support to come.
He has asked Healey to look at what more the government can do on the cost of living, and the chancellor has called it his main focus. Healey, in turn, has said he will oversee strong fiscal discipline, which will limit how much the government can spend.
Burnham has said his government will stick to Labour's 2024 manifesto pledges not to raise income tax, VAT or National Insurance. He has also promised to follow the fiscal rules set by former Chancellor Rachel Reeves, including balancing day-to-day spending with tax revenue by the end of the decade.
Source: BBC News
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