Iran war threatens to crush UK economy: Treasury officials warn growth could slow to just 0.3%

Andy Burnham has been warned that the UK economy will grind to a halt if Donald Trump presses on with his war on Iran – just as repeated heatwaves hit output.

Treasury officials predict growth will slow to 0.3 per cent in 2027 if the Strait of Hormuz remains effectively closed for the rest of this year due to the conflict.

That would be the worst performance since 2023, when Britain was in the grip of a cost-of-living shock following Russia’s invasion of Ukraine, and well below the 1.6 per cent expansion that has been forecast by the Office for Budget Responsibility.

The internal forecast also warns inflation could rise from 2.6 per cent to 4.3 per cent in the first quarter of 2027, hitting living standards.

The Treasury briefing, reported by Bloomberg, came as Iran and the US remain at loggerheads over a permanent end to the war in the Gulf.

And it represents a major headache for Burnham and his Chancellor John Healey ahead of a Budget in October that analysts warn could see £25billion of tax hikes to fund lavish spending plans.

Any slowdown – such as the one outlined by Treasury officials – would blow a fresh hole in public finances as tax receipts fall and welfare payments rise.

And surging inflation would undermine the Government’s efforts to help households with the cost of living.

Official figures today are expected to show growth slowed in the second quarter of the year, following an expansion of 0.6 per cent in the first three months.

It is feared the economy ground to a halt in June, with no growth, raising the prospect of a painful bout of ‘stagflation’ and further undermining the claims of ex-Chancellor Rachel Reeves to have left Britain on a firm footing.

Burnham and Healey have also been warned that heatwaves are taking a toll as productivity tumbles, high street sales wilt, and drought damages harvests and threatens food shortages.

Martin Beck, an economist at WPI Strategy, estimated the hot weather has cost the UK economy around £3billion, while green think-tank Verdant put the figure at £4.4billion.

The oil price remained close to $90 a barrel last night amid disruption to shipping through the Strait of Hormuz, through which a fifth of global oil and gas supplies passed before the war.

And the International Energy Agency yesterday warned global stockpiles of oil were ‘rapidly depleting’ due to the conflict.