• Swindon & Wiltshire Economy
• Tuesday August 4 2026

EY upgrades UK economic outlook, but warns Iran conflict may halt growth

The UK economy has demonstrated continued resilience despite disruption from the conflict in the Middle East and is now forecast to grow at a slightly better-than-expected pace in 2026, according to the new UK Economic Outlook from Bristol-based accountancy giant EY.

The EY Economic Outlook now forecasts that UK GDP will grow by 0.9 per cent in 2026, a slight increase from the 0.8 per cent growth projected in May.

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

The UK economy’s performance in the second quarter of 2026 was better than previously anticipated as oil prices returned to pre-conflict levels more quickly than expected, preventing a more significant increase in inflation.

However, the recent escalation of the conflict and disruption in the Strait of Hormuz and the subsequent impact on energy prices and inflation are projected to weigh on growth towards the end of the year, while a prolonged closure could cause the UK economy to contract next year.

The Outlook’s baseline forecast is based on the Strait of Hormuz reopening by the end of Q3 2026, albeit with subdued levels of tanker traffic.

However, if there is an escalation in the conflict and the strait remains closed until early or mid-2027, the Outlook’s model suggests that UK GDP growth could fall to 0.5 per cent this year and contract by 0.2 per cent in 2027.

If the Strait of Hormuz reopens by Q3, UK inflation is forecast to rise to 3.5 per cent by the end of the year.

However, if the strait remains closed until at least early 2027, there is a risk that UK inflation could rise to 6.4 per cent by the end of 2026.

The Outlook expects the Bank of England to hold the Bank Rate at 3.75 per cent for the rest of 2026.

The next reductions in interest rates are predicted to occur in April and July 2027, with the Bank of England expected to implement two cuts of 25 basis points each before leaving the Bank Rate at 3.25 per cent for the remainder of 2027.

EY managing partner Anna Anthony said: “Prolonged global economic disruption continues to challenge UK companies and balancing short-term pressures with future growth ambitions needs to remain a boardroom priority.

“Businesses that continue to invest in productivity and technology during periods of uncertainty will be better placed to capitalise on market opportunities once conditions improve.

“Continued action to reduce structural cost pressures facing companies, including energy prices, should help to unlock the confidence and capital businesses need to invest longer term and drive economic growth.

“The UK will also need to draw on its sectoral strengths, with business services and technology set to remain significant growth drivers.

“The Government’s Industrial Strategy offers an opportunity to amplify that contribution, and nurturing growth across all eight Strategy sectors will be critical to encouraging sustained investment.”