The UK economy will barely grow next year if disruption to the Strait of Hormuz linked to the Iran war continues until the end of 2026, Treasury officials have briefed the Prime Minister.
Internal modelling from the Treasury suggests UK GDP (gross domestic product) could see growth as low as 0.3% in 2027, Government sources have said.
Officials have said they routinely plan for all possible scenarios, with this growth projection linked to a more extreme situation.
It comes amid a backdrop of modest growth in the UK economy, although the Office for National Statistics (ONS) is expected to reveal on Thursday that UK GDP saw no growth in June.
The conflict in the Middle East has driven energy prices higher since February and pressed down on consumer sentiment.
On Wednesday, modelling shown to the Prime Minister and Chancellor, first reported by Bloomberg, said the UK economy could grow by 0.9% this year if there is no permanent peace deal between the US-Israeli forces and Iran.
This would miss the 1.1% prediction from the Office for Budget Responsibility (OBR) earlier this year. The OBR had also predicted 1.6% GDP growth in 2027.
The more extreme scenario also indicated that Consumer Price Index (CPI) inflation could peak at 4.3% in the first quarter of next year, with disruption in the Strait of Hormuz likely to keep oil and gas prices elevated.
The forecasts come ahead of further key economic data for Andy Burnham.
A consensus of economists predicted that the ONS will reveal on Thursday that the economy was flat in June but grew by 0.4% in the second quarter of this year.
This would mean the economy has continued growing after a 0.6% rise in GDP for the first three months of 2026.
Rob Wood, chief UK economist for Pantheon Macroeconomics, said this would show “the big picture is that the economy has remained resilient to the hit from the war in Iran”.
The services sector, the most dominant in the UK economy, strengthened in May, largely coming from professional services and scientific research and development.
Furthermore, recent data has pointed to factories and manufacturing firms stockpiling in anticipation of supply shortages and price rises, which has helped keep growth elevated.
But a weaker picture may be emerging from June as the heatwaves bring mixed results for businesses and some industries come under increasing pressure, economists said.
