Strange as it might sound, close watchers of the British economy were beginning to feel almost optimistic at the start of this year. Optimism is not the usual state of affairs for the British economy.

But nine or so months ago, things – finally – seemed to be turning around. Inflation looked to be coming down towards the Bank of England (BoE) target of 2 per cent and investors expected the central bank to be cutting interest rates in the months ahead.

Consumer and business confidence was gradually climbing. If nothing else happened to throw this off course, the chances of a virtuous circle of higher confidence driving higher spending and, in turn, yet higher confidence looked plausible. It is all too easy to dismiss confidence as just vibes, but economists have known for a long time when it comes to growth, the vibes matter. Sadly, though, for the Government, for British firms and, most of all, for ordinary Britons, something happened. That something being the war of choice launched by the United States and Israel against Iran.

The world’s most important maritime choke point has been essentially closed for almost seven months. In normal times, somewhere between 120 and 150 vessels transited the Strait of Hormuz daily, carrying about 20 million barrels of crude oil, not to mention a large share of the world’s liquefied natural gas and a whole host of other products and commodities. Since March, shipping has slowed to a trickle, leaving the world with much less energy available. That has fundamentally changed the global economic outlook, pushing prices up, pulling real incomes down and transforming the outlook for interest rates. In short, Donald Trump’s war in the Gulf is making people’s mortgages more expensive.

Previous Trump interventions have been short and sharp, but this one is dragging on. The US President now seems trapped, unable to pay the price of further escalation but also unable to admit that the status quo looks like an Iranian victory.

But while the closure of the Strait of Hormuz is very obviously the single biggest factor affecting the global – and British – economic outlook for 2026, it also sometimes feels like an underappreciated one. That is because the situation has now been dragging on for months and the worst does not seem to have happened. This spring economists and energy market analysts were quick to warn of dire consequences if the Strait of Hormuz remained closed for even a few weeks. Fears were expressed of petrol prices hitting £2 a litre or of Europe running out of jet fuel.

Economic systems, though, are often surprisingly adaptable and resilient, as the pandemic lockdowns demonstrated. Workarounds and partial fixes have been found. Saudi Arabia has managed to divert several million barrels per day of oil away from the Persian Gulf and towards the Red Sea to bypass the closed waterway. Strategic oil reserves held by governments across the advanced economies have been tapped to ease supplies. Existing stocks and inventories held by private firms have been run down. Most significantly, and taking many close energy market watchers by surprise, China has demonstrated a larger-than-expected ability to cut its own imports for several months – suggesting it holds higher reserves than previously thought.

The oil market, like the boy who called wolf, sounded the alarm early and often and, as a result, the general public seems to have registered no apocalypse and have moved on. The closure of the Strait of Hormuz has slipped down the global news agenda and yet, to state the obvious, it remains closed. And the many and varied workarounds put in place to mitigate the worst impacts can only last so long. Inventories can be run down only until they run out. Rather than a dramatic economic explosion, the closure of the Strait of Hormuz has become a slower-moving but no less real economic danger.

The BoE, according to its latest forecasts, now expects inflation to rise to around 4 per cent at the start of 2027. That means interest rates are more likely to be heading up than down in the near future and is almost entirely a result of the war in the Middle East. And while the BoE has so far employed a wait-and-see strategy and held back from following its American and European peers in actually hiking rates, that has not offered much support to borrowers. As markets expect rates to rise, mortgage deals in Britain have already been repriced to reflect this.

2027 is shaping up to be a rough year for British living standards. Higher energy prices coupled with higher borrowing costs look set to take a bite out of household incomes. Fears about rising borrowing costs could well push the Government into another round of tax hikes, adding to the pain. Sitting behind all of this is the closure of the Strait. The single biggest factor affecting our national economy is war launched this spring. The fighting might have devolved to less newsworthy occasional skirmishing but the economic fallout is just beginning.