Recession fears are once again troubling Britain, adding to the tension created by another bout of killer heat.
EY, the professional services firm, is one of those forecasters that people take note of when it uses the R-word. It actually nudged up its UK growth forecast to a solid, if unspectacular, 0.9 per cent for 2026. But it was the warning that came with it that caught the eye.
“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,” said Peter Arnold, EY’s UK chief economist.
A recession occurs if an economy records two consecutive quarters in the red. Arnold fears that could happen if the Strait of Hormuz, that narrow strip of water in the Middle East we are now all far too familiar with, remains closed into next year.
About a fifth of the world’s oil and gas travels through it, not to mention agrichemicals and the like. Britain doesn’t source much of its energy from the region but it doesn’t matter: if the end result of its closure is a sharp rise in global prices rise, everyone pays more.
The upshot could be the worst possible sort of recession: one driven by a price shock, forcing the Bank of England to hike interest rates at a time when the economy needs the stimulus of them being lowered. This is called “stagflation”. It is what economists use to frighten little eco-children when they’re acting up.
But wait, I hear you say, hasn’t inflation fallen? Officially it has, even if it doesn’t feel that way with every food shop feeling like a deep dive into the black lagoon. Unfortunately, the 2.6 per cent recorded in June remains above the Bank of England’s 2 per cent target. It is expected to rise from here, and those of us who watch the voting of the Bank’s rate-setting monetary policy committee (MPC) have noticed that the number of MPC members calling for a rise has been steadily increasing.
The Bank held at 3.75 per cent last week on a 6-3 vote, but was at pains to stress that it would be “ready to act” in response to events in the Middle East. In other words, the economy could face a double whammy from higher rates and energy costs.
What are the other indicators prophets of doom should look for?
The forward-looking purchasing managers indices (PMIs) for the UK economy serve as a useful warning light. Collated from surveys of people with an advanced view of order levels and business health, anything below 50 indicates contraction. The latest manufacturing PMI fell to a four-month low of 51.9 in July, a worrying sign. Keep an eye on the figure produced by the UK’s dominant services sector, which unexpectedly returned to growth in June (51.8). The number for July is due on Wednesday.
If these indices start slipping into the red – construction is the third of the trio and has been in a trough for some time now – watch out.
The next monster under the bed to look out for is business investment. Official figures showed a rise in the first quarter of the year (January to March) but hostilities only broke out at the end of the February and the number was down on 2025.
A slowdown will crimp growth and hit employment. Unemployment is often described as a “lagging Indicator” because jobs are usually only cut when an employer feels it absolutely has to. Culls are expensive and disruptive. If a company makes a bad call and the business environment quickly recovers, it often has to go out and hire people back, which is also costly and disruptive. But keep an eye on vacancies. It is much easier, and cheaper, to put a freeze on hiring than it is to start sacking people. The number of vacancies in Britain fell in June. It isn’t hard to see why – a nervous economy and the war.
Your final bright red warning light is the depressing spectacle of Britain’s politicians casting around for scapegoats. John Healey, the new Chancellor, got the ball rolling at the weekend, shaking his fist at the supermarkets and petrol stations, and warning that Big Brother will be watching them for any signs of price gouging.
The response has been swift and fierce, with the supermarkets pointing out (again) that they operate on very low margins (less than 2 per cent), which have fallen in recent months. Privately they are furious, arguing that it isn’t just the energy crisis driven by the Middle East that is pushing up the cost of living. Government policies have played an important role, too.
Higher taxes on jobs, a rapidly rising minimum wage, and forcing supermarkets to rearrange their shelves to satisfy the demands of the health lobby have combined to light a fire under the grocery sector’s cost base. Perhaps someone might like to have a quiet word in Mr Healey’s shell-like? Call me a cynic, but I suspect he already knows.
Needless to say, Donald Trump has suspended strikes and is talking peace again. So maybe the Strait of Hormuz reopens, EY’s fears fade, and Britain continues to grow, albeit at a less than stellar rate.
However, if the conflict continues, keep an eye on those indicators and prepare to batten down the hatches. It could get nasty.