Iran conflict could slash UK growth to 0.3% next year, Treasury warns

Key facts

• UK GDP growth could be as low as 0.3% in 2027 due to potential disruption in the Strait of Hormuz.
• Treasury modelling indicates inflation could peak at 4.3% in early 2027.
• The conflict in the Middle East has already impacted UK businesses by raising oil and fuel prices and disrupting supply chains.
• Chancellor John Healey is prioritizing cost-of-living support in the upcoming Budget.
• The government plans to adhere to manifesto pledges not to increase income tax, VAT, or National Insurance.

Treasury modelling presented to Prime Minister Andy Burnham and Chancellor John Healey suggests that UK GDP growth could be as low as 0.3% in 2027 if disruption in the Strait of Hormuz continues until the end of 2026. This scenario, considered a reasonable worst-case, assumes the Strait remains effectively closed for five months and no permanent US-Iran peace deal is reached until the new year.

Under this modelling, inflation is projected to peak at 4.3% in the first three months of 2027, a significant increase from the current rate of 2.6%. The UK economy experienced a strong start to the year, but growth faltered, partly due to the Middle East conflict impacting oil prices and supply chains.

Economists anticipate growth of 0.4% for the April-June period, with official figures due on Thursday. The Treasury's projection for 2026 growth is 0.9%, below the OBR's March forecast of 1.1%. The government faces pressure to address the financial burden on households and businesses in the upcoming Budget on October 28.

Chancellor Healey has stated that addressing the cost of living will be his main focus. Prime Minister Burnham has already announced policies such as removing VAT from domestic electricity bills and accelerating the end of "subscription traps," but has indicated further support may be necessary. Burnham's government has pledged to uphold manifesto commitments not to raise income tax, VAT, or National Insurance contributions, and to adhere to fiscal rules requiring balanced day-to-day spending by the end of the decade.