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(Bloomberg) — The UK economy will barely grow next year if the Strait of Hormuz stays badly disrupted until the end of 2026, according to internal Treasury modeling that complicates Andy Burnham’s premiership and the coming budget.

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In a worst-case scenario modeled by Treasury officials, the key waterway was seen remaining effectively closed this year, with no permanent peace deal between the US and Iran until the new year. In that scenario, GDP growth for 2026 is seen at 0.9%, below the 1.1% forecast by the Office for Budget Responsibility in March.

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But, with the impacts taking time to fully filter through, growth for 2027 is put at just 0.3%. That would be the weakest expansion since 2023, when Britain was in the grip of its last cost-of-living shock. It would represent a sharp downgrade on the 1.6% seen by the OBR, the fiscal watchdog that produces the UK’s official forecasts.

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CPI inflation meanwhile was seen as peaking at 4.3% in the first quarter of 2027 in this scenario, posing a challenge to Burnham’s pledge to help with the cost of living. It was expected to have fallen to the Bank of England’s 2% target if the war hadn’t happened.

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The GDP forecasts are at the bleaker end of the range envisaged by economists should the disruption to energy supplies drag on. In its adverse scenario published last month, the BOE saw the economy growing 1.1% this year and 0.9% in 2027. Under a bad-case scenario modeled by Bloomberg Economics, GDP expands 0.6% in 2026 with a mild recession at the end of the year, and by 0.7% next year.

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Inflation peaks at 4.5% in the first half of next year, according to both the BOE and Bloomberg Economics.

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A further spike in the oil price could raise concerns about financial stability in a worst-case outcome, the assessments warned, according to people with direct knowledge of the matter. They were granted anonymity discussing internal analysis that has not been made public.

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The assessments have been shared with Burnham and Chancellor of the Exchequer John Healey ahead of the new administration’s first budget due to be released on Oct. 28. No. 10 and the Treasury didn’t immediately respond to requests for comment.

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If economy comes close to flatlining next year, it would leave Burnham with a battle to show Britons he had materially improved their lives in his first 18 months in power. The new premier came to power last month, tasked by his governing Labour Party with turning around its fortunes following Keir Starmer’s unpopular premiership.

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The warnings also further complicate what was already a challenging budget for Healey. Not only must the chancellor find money to fulfill Burnham’s ambitions for more spending, he also has to prepare for a potential growth downgrade and higher inflation.