Iran conflict risks stalling UK economic growth

A major financial advisory firm has warned that ongoing tensions with Iran could significantly disrupt the United Kingdoms economic trajectory, potentially halting future growth. The outlook for this year remains cautiously optimistic, with revised forecasts predicting an expansion of 0.9 per cent. However, these positive projections rely heavily on the Strait of Hormuz remaining open to allow global energy supplies and essential goods to flow freely from the Gulf region.

Economists at EY caution that prolonged disruption to oil prices could stall growth by late next year. In a scenario where instability persists through mid-2027, annual expansion is expected to slow to 0.5 per cent before contracting further in subsequent periods. While inflation is projected to settle near 3.5 per cent towards the end of this calendar year, adverse conditions could push rates as high as 6.4 per cent within months if supply chains are severed.

Political developments offer a glimmer of hope, with reports suggesting President Trump may be nearing an agreement for peace that would mitigate worst-case economic scenarios. Nevertheless, investors and policymakers remain wary given the rapid collapse of previous ceasefire arrangements following renewed strikes between Iran and the United States. These uncertainties cast doubt on recent optimism expressed by government officials regarding cost-of-living pressures.

Chancellor John Healey acknowledged that businesses and households will continue to face financial strain over coming months despite efforts to ease burdens. Peter Arnold, chief economist at EY, noted that volatility in energy markets tests national resilience even after the first half of the year exceeded expectations. The construction sector remains a particular concern due to costs rising by more than 30 per cent since 2019, although vacancies there remain above pre-pandemic levels while other sectors see job postings decline.

The consultancy suggests that advancements in artificial intelligence will be crucial for improving productivity across the economy as external threats loom. Technology and business services are expected to drive growth forward despite these headwinds.