The ongoing Iran conflict could bring UK economic growth to a standstill, with the effectiveness of Andy Burnham and John Healey's economic policies depending heavily on President Trump's decisions, according to a warning from City firm EY.

The Big Four consultancy revised its UK growth forecast upward to 0.9 percent for this year, suggesting the economy may outperform initial expectations. However, EY economists cautioned that these baseline projections assume the Strait of Hormuz remains open, enabling roughly one-fifth of global oil and gas supplies along with critical goods to flow out of the Gulf region. The narrow passage between Iran and Oman has long been regarded as one of the world's most critical energy chokepoints, and any sustained disruption would immediately affect fuel prices and shipping costs far beyond the Middle East.

EY analysts stated that "prolonged energy price disruption may halt growth in 2027." Under an alternative scenario in which disruption persists through mid-2027, the firm projected growth would decelerate to 0.5 percent this year and the economy would contract by 0.2 percent next year.

Inflation is on track to approach 3.5 percent by year-end regardless of the outcome, while the firm's adverse scenario indicated it could surge to 6.4 percent within a matter of months. For the UK, where households have already weathered a multi-year cost-of-living crisis that saw inflation peak above 11 percent in late 2022, renewed energy-driven price pressures would feed directly into consumer bills and complicate the Bank of England's effort to bring interest rates down further from their 5.25 percent peak.

On Sunday morning, President Trump indicated that a new peace agreement with Iran was nearing completion, fueling optimism that the global economy might avert the most severe wartime consequences. However, investors and policymakers are likely to approach any statements from Trump or Iranian leadership with caution, given that a previously signed Memorandum of Understanding collapsed when strikes by both Iran and the United States shattered a 60-day ceasefire.

UK Economy Faces a Critical Test

EY's projections have dampened Andy Burnham's positive outlook for the UK economy and his efforts to reduce financial pressure on businesses and households.

Chancellor John Healey acknowledged on Sunday that the government "can't completely stop the squeeze" confronting businesses and families in the months ahead.

Peter Arnold, EY's UK chief economist, noted that recent oil and gas price volatility would once again "test" the country's ability to withstand economic shocks, even though growth exceeded expectations during the first half of the year.

Arnold added that the UK would depend on the technology sector and certain business services to drive growth. Construction remains a "concern" due to escalating costs, which have climbed more than 30 percent since 2019.

According to the analysis, construction is the sole private-sector industry where job vacancies have stayed above pre-pandemic levels, as postings have declined across both manufacturing and services.

The consultancy also suggested that agentic AI could contribute to improved productivity throughout the broader economy.

Source: City AM