EY Warns UK Faces Recession Risk as Middle East Conflict Drives Up Energy Prices

The UK economy faces the risk of a recession if the Strait of Hormuz remains closed, according to an assessment by EY. Analysts warn that the breakdown of regional ceasefires has triggered a resurgence in global oil and gas prices, introducing significant uncertainty for businesses and consumers alike.

Higher energy costs are expected to filter through into increased operational expenses for companies, while domestic demand suffers from a squeeze on disposable incomes driven by rising inflation and weakening wage growth. Although output price inflation cooled to a four-month low in July amid easing supply chain pressures, economists note that this relief is likely to be temporary.

The broader outlook remains heavily dependent on geopolitical developments in the Middle East. The potential for sustained higher energy prices threatens to reverse recent cooling trends in goods inflation, compounding economic pressures on the UK as businesses navigate a difficult second half of the year.

Meanwhile, currency markets saw notable movement as the Japanese yen strengthened to its highest level in three months, reaching ¥155 against the US dollar following a joint currency intervention by Tokyo and Washington.