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

Internal Treasury modelling has warned that the United Kingdom’s economic expansion could be reduced to a mere 0.3 per cent next year should disruption in the Strait of Hormuz persist through to the end of 2026. The analysis, presented to Prime Minister Andy Burnham and Chancellor John Healey, outlines a scenario in which the vital shipping lane remains effectively closed for five months and no permanent peace agreement is reached between the United States and Iran until the new year.

Under this reasonable worst-case projection, growth for 2026 would stand at 0.9 per cent, falling slightly below the Office for Budget Responsibility’s March forecast of 1.1 per cent. However, the outlook for 2027 is significantly more subdued, with projected growth of just 0.3 per cent compared with the OBR’s current estimate of 1.6 per cent. The modelling also indicates that inflation could peak at 4.3 per cent in the first quarter of next year, rising from its present level of 2.6 per cent, which sits just above the Bank of England’s two per cent target.

Government officials maintain that they routinely plan for all possible scenarios to ensure preparedness. The UK economy experienced a robust start to the year before growth faltered as the Middle East conflict began to impact businesses by driving up oil and fuel prices and disrupting supply chains. Official figures released on Thursday will reveal the extent of economic growth between April and June, with economists anticipating a quarterly increase of 0.4 per cent.

The Prime Minister and Chancellor face mounting pressure to utilise the upcoming Budget on 28 October to alleviate the financial strain on households and firms. Since assuming office three weeks ago, Mr Burnham has introduced measures including the removal of VAT from domestic electricity bills and the acceleration of rules against subscription traps. However, he recently acknowledged that these steps alone are insufficient to tackle the cost of living crisis, prompting him to task Mr Healey with identifying further support mechanisms.

Despite calls for additional aid, the Chancellor has emphasised a commitment to strong fiscal discipline, which will constrain government expenditure. Mr Burnham has reiterated his intention to adhere to the party’s 2024 manifesto pledges, which rule out increases to income tax, VAT or National Insurance contributions. Furthermore, the government remains bound by the fiscal rules established by former Chancellor Rachel Reeves, including a pledge to balance day-to-day spending with tax revenues by the end of the decade.