EY nudges up 2026 UK growth forecast

3rd Aug 2026 07:06

(Sharecast News) - EY nudged up its 2026 UK growth forecast on Monday but warned of a potential recession if the Strait of Hormuz stays closed until early-mid 2027.

According to its new UK Economic Outlook, the economy is projected to grow by 0.9% in 2026, up a touch on the 0.8% growth forecast in May. EY noted a better-than-expected performance in the second quarter as oil prices returned to pre-conflict levels more quickly than expected.

GDP growth is expected to rise to 1.2% in 2027, in line with the previous forecast.

EY said the recent escalation of Middle East tensions and disruption in the Strait of Hormuz and subsequent impact on energy prices and inflation are set to weigh on growth towards the end of the year, while a prolonged closure could cause the economy to contract next year. Around 20% of the world's oil supplies normally pass through the Strait.

The outlook's baseline forecast assumes the Strait of Hormuz reopens by the end of the third quarter of this year, albeit with subdued levels of tanker traffic. However, should the conflict escalate and the Strait remain closed until early or mid-2027, growth could fall to 0.5% this year and contract 0.2% in 2027.

If the Strait of Hormuz reopens by the third quarter, inflation is expected to rise to 3.5% by the end of the year. However, if it remains closed until at least early 2027, inflation could rise to 6.4% by the end of 2026, EY said.

The outlook also assumes the Bank of England holds Bank Rate at 3.75% for the rest of 2026. EY expects rate cuts of 25 basis points each in April and July 2027, and for Bank Rate to be left at 3.25% for the remainder of next year.

Last Thursday, the Bank kept interest rates unchanged as widely expected, although three policymakers voted for tighter monetary policy amid concerns over energy prices and persistent inflationary pressures. The nine-person Monetary Policy Committee voted six to three to maintain Bank Rate at 3.75%, with Megan Greene, Catherine Mann and Huw Pill preferring a 25-basis-point rise to 4%.

The BoE highlighted that crude and refined energy prices had remained volatile and above levels seen before the conflict in the Middle East, leaving the impact of the energy shock on the UK economy uncertain.

Peter Arnold, EY UK chief economist, said: "The UK economy has proved more resilient than many expected this year, prompting a modest upgrade to our growth forecast. Oil prices had started to fall back to pre-conflict levels and, while business and consumer confidence have softened, this decline remains less severe than the shock triggered by the 2022 energy crisis. Ongoing disruption to global energy markets will now start to test this economic resilience.

"If the Strait of Hormuz reopens in the coming months, we expect the UK to avoid a more pronounced downturn, but an extended closure into 2027 would raise inflation and could push the economy into contraction next year.

"As growth becomes harder to sustain, the UK is likely to rely increasingly on those sectors that have underpinned economic performance in recent years, particularly technology and high-value business services. At the same time, longstanding pressures in construction remain a concern. Rising project costs, persistent labour shortages and weak productivity growth risk constraining the delivery of major infrastructure projects at a time when demand remains high. Enhancing productivity in the sector will be critical if the UK is to deliver its infrastructure ambitions while supporting broader economic growth."