UK faces recession if Strait of Hormuz stays closed, forecaster warns

LONDON, Aug 3 (Reuters) - Britain's economy is likely to shrink in 2027 if the Strait of Hormuz does not reopen to shipping before the middle of next year, forecasters at accountants EY warned on Monday.

EY slightly nudged up its growth forecast for this year to 0.8% from 0.9%, on the basis that the Strait reopens by the end of September, and sees growth of 1.2% in 2027 on that basis.

"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," EY UK Chief Economist Peter Arnold said.

• EY predicts that if the Strait of Hormuz remains shut until early to mid 2027, UK growth this year will slow to 0.5% and that the economy will shrink 0.2% in 2027

• Inflation is likely to rise to 6.4% by the end of 2026 under that scenario, compared with a lower peak of 3.5% this year if the Strait reopens in the next couple of months

• Bank of England forecasts last week, under an adverse scenario where oil and gas prices remain 30%-60% higher than markets expect, still showed the economy growing by close to 1% next year while quarterly inflation peaked at 4.5%

• EY expects the BoE to keep interest rates on hold this year and then cut them next year from 3.75% to 3.25% with moves in April and July

(Reporting by David Milliken; editing by Suban Abdulla)