Britain 'faces recession and doubling inflation within months' - but crisis could be averted by just one breakthrough

Inflation, currently at 2.8 per cent, could surge to 6.4 per cent by the end of this year under the firm's worst-case outlook.

EY blames the continued shutdown of the Strait of Hormuz, with the knock-on effects back in Britain driven by soaring energy and oil costs.

If the vital shipping route, which normally carries a fifth of global oil and gas, stays shut until early or mid-2027, the UK will feel it - and hard.

EY's warning does, however, provide scope for a breakthrough and a brighter economic outlook ahead.

If the ongoing Iran war and its disruption to Middle Eastern waterways can be resolved, and if the strait can reopen before the end of September, EY's central forecast is considerably more optimistic.

If that happens, Britain's GDP growth predictions are upgraded to 0.9 per cent from a previous estimate of 0.8 per cent - then a 1.2 per cent expansion in 2027.

CHancellor John Healey may have to contend with GDP growth slowing to just 0.5 per cent this year

TREASURY

Interest rates are forecast to hold at 3.75 per cent through the remainder of this year, with two cuts anticipated in April and July 2027, bringing the rate down to 3.25 per cent.

Last week, the Bank of England opted to keep rates unchanged at 3.75 per cent but indicated it was prepared to raise them if the Iran war persists and drives inflation sharply higher.

The Bank expects CPI inflation, which stood at 2.6 per cent in June, to peak at roughly 3.2 per cent later this year before gradually falling back towards its two per cent target.

Peter Arnold, EY's chief economist for the UK, said: "The UK economy has proved more resilient than many expected this year, prompting a modest upgrade to our growth forecast.

PICTURED: The aftermath of a US strike on a port in Kuhestak, Iran, near the Strait of Hormuz in July. EY has issued a grim recession warning if the strait remains shut

REUTERS

"Ongoing disruption to global energy markets will now start to test this economic resilience.

"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."

US President Donald Trump is angling for a breakthrough within hours, however.

Last night, Mr Trump said talks with Iran will go ahead on Monday, but declined to set a deadline for an agreement after earlier saying he had called off an imminent attack which would have been the world's largest "since World War Two".

Donald Trump last night called off an imminent attack on Iran which would have been the world's largest 'since World War Two'

REUTERS

He had said late on Saturday that Iran and other Middle Eastern countries had asked for time to complete a deal that would lead to "the immediate, complete and total" reopening of the strait and "an end to Iran's nuclear threat" but that Tehran must "rapidly make a DEAL".

As he returned to Washington from a weekend in New Jersey, Mr Trump told reporters that a negotiation would begin on Monday afternoon but did not provide details of where it would take place or who would be involved.

Asked if there was a deadline for Iran to come to an agreement, the President declined to answer.

"Would I rather make a deal? I'm not looking to kill people because people die, a lot of people die, and we don't want that," Mr Trump said in response.

The President has repeatedly issued threats that he would escalate the war on Iran he launched alongside Israel in late February, only to allow more time for talks, which - so far - have not led to a comprehensive deal.