The UK Treasury has been stress-testing the economy against a prolonged disruption in the Strait of Hormuz, and the internal scenarios are sobering. According to briefings prepared for the Prime Minister, if shipping through the vital oil chokepoint remains disrupted through the end of 2026, UK economic growth could slow to just 0.3% in 2027, while inflation could spike to 4.3%.
The Strait of Hormuz, a narrow waterway between the Persian Gulf and the Gulf of Oman, is one of the world's most critical energy arteries. Roughly a fifth of global oil consumption passes through it, along with significant volumes of liquefied natural gas. Any sustained disruption there doesn't just affect oil prices—it feeds directly into the cost of energy for households and businesses, and into the price of goods that rely on shipping.
What the scenarios show
PA Media reports that officials have run several different scenarios, with the most severe case painting a clear picture of stagflation—a combination of weak growth and rising prices. In that scenario, growth falls to 0.3% in 2027, a fraction of the UK's potential rate, and Consumer Price Index (CPI) inflation peaks at 4.3% in the first quarter of that year.
That inflation peak would be well above the Bank of England's 2% target, and it would come at a time when the economy is barely growing. The main driver is straightforward: energy is a basic input into almost everything. When oil and gas prices stay elevated for months, the cost of production and transport rises, and those costs eventually pass through to consumers.
This is not a classic slowdown where inflation fades on its own. In a typical recession, demand falls and price pressures ease. But a supply shock like this one hits both sides at once—it raises costs while also sapping spending power, leaving policymakers with a difficult trade-off.
Why this matters for investors
For everyday investors, the key takeaway is that geopolitical risks can have a direct impact on portfolios, even if they seem distant. The UK Treasury's scenarios are internal planning tools, not forecasts, but they highlight how a single event in a faraway strait can ripple through the global economy.
If such a disruption were to materialise, energy prices would likely surge, which could benefit oil and gas producers but hurt airlines, manufacturers, and any business with high energy costs. Inflation running at 4.3% would also put pressure on central banks to keep interest rates higher for longer, which tends to weigh on bond prices and growth-oriented stocks.
Investors have already seen some of this play out in recent weeks. Oil prices have climbed as Hormuz shipping risks resurfaced, and Gulf stocks have edged up on thin Hormuz traffic, reflecting the market's sensitivity to any signs of trouble in the region.
The broader context
The Treasury's modelling comes against a backdrop of already-fragile UK growth. The economy has been struggling to expand at a healthy pace, and any additional shock could push it closer to stagnation. The scenarios are not predictions—they are contingency plans designed to help the government prepare for a range of outcomes.
But they also serve as a reminder that energy security is an economic issue, not just a geopolitical one. The UK has been working to diversify its energy sources, but it remains exposed to global oil and gas prices, and a prolonged Hormuz closure would test that resilience.
For investors, the lesson is to be aware of the risks that lurk beneath the surface. Some companies are already stockpiling parts to shield themselves from supply shocks, a sign that businesses are taking these risks seriously. While no one can predict whether the strait will actually be disrupted, the Treasury's scenarios show how much damage it could do—and why it's worth paying attention to.
What to watch next
Investors should keep an eye on oil prices and any headlines about shipping traffic in the Strait of Hormuz. Oil has climbed as the closure persists, and any further escalation could move markets. Also watch for inflation data, as a spike in energy costs would show up in consumer prices within months.
The Bank of England's response will be crucial. If inflation rises while growth is weak, the central bank faces a tough choice between fighting inflation and supporting the economy. That decision would have direct implications for interest rates, mortgages, and bond yields.
For now, the Treasury's scenarios are just that—scenarios. But they underline how quickly the economic outlook can change when the world's energy supply is threatened. For investors, staying diversified and keeping an eye on energy exposure is a prudent approach, even if the worst-case never materialises.
