Treasury officials have warned Andy Burnham that UK economic growth could slow to 0.3 per cent in 2027 as conflict in Iran threatens output.
Internal forecasts indicate the British economy will grind to a halt if United States President Donald Trump presses on with the war, leaving the Strait of Hormuz effectively closed for the remainder of this year.
The projected 0.3 per cent expansion would mark the worst economic performance for the United Kingdom since 2023, when the country suffered a cost-of-living shock following Russia's invasion of Ukraine.
The internal figure falls significantly below the 1.6 per cent growth rate previously forecast by the Office for Budget Responsibility, the UK's independent fiscal watchdog.
Inflation Spike and Fiscal Pressure
The Treasury briefing, originally reported by Bloomberg, warns that inflation could rise from 2.6 per cent to 4.3 per cent in the first quarter of 2027, severely squeezing household living standards.
The worsening outlook comes as Iran and the US remain at loggerheads over a permanent end to military action in the Gulf region.
The growth predictions present a major headache for Burnham and Chancellor John Healey ahead of the upcoming Budget in October.
Financial analysts warn that Healey may be forced to introduce up to £25billion in tax hikes to fund existing spending plans.
Any broader economic slowdown would widen the gap in public finances as tax receipts fall and welfare payments rise, while surging inflation undermines efforts to help households with the cost of living.
Sluggish Growth and Climate Toll
Official figures released today show UK growth slowed to 0.4 per cent in the second quarter of the year, following a 0.6 per cent expansion in the first three months.
Economists fear further deceleration ahead, raising the prospect of stagflation, a condition where high inflation combines with stagnant economic growth.
The figures also undermine claims by former Chancellor Rachel Reeves that she had left the British economy on a firm financial footing.
Compounding the geopolitical crisis, officials have warned Burnham and Healey that repeated heatwaves are taking a heavy toll on national output.
High temperatures have caused productivity to tumble, high street sales to decline, and severe drought to damage agricultural harvests, raising fears of food shortages.
Martin Beck, an economist at WPI Strategy, estimated that the hot weather has cost the UK economy around £3billion, while green think-tank Verdant put the figure at £4.4billion.
Energy Market Disruption
Global energy markets remain under intense strain due to ongoing shipping disruptions through the Strait of Hormuz, through which a fifth of global oil and gas supplies passed before the war.
Crude oil prices remained close to $90 a barrel last night as tankers struggled to navigate the waterway, a narrow sea passage connecting the Persian Gulf with the Gulf of Oman.
The International Energy Agency, an autonomous intergovernmental energy monitoring organization, warned yesterday that global stockpiles of oil were "rapidly depleting" due to the conflict.
