The UK’s ‘real economy’ is now facing a recession
The UK’s private-sector “real economy” has slipped into a mild recession just as the country confronts a potential energy shock from escalating conflict in the Middle East.
This is according to RSM UK’s latest Real Economy Barometer, which strips out volatile public-sector elements like imputed rents, government administration, education, and health to focus on roughly 79% of the economy centred on goods- and services-producing businesses.
The barometer shows the real economy contracted in the final two quarters of 2025, each by about 0.1%. This qualifies as a very mild technical recession in those core private activities, the group said.
No momentum
Momentum has evaporated further into 2026. Real economy output flatlined at 0% growth in January, mirroring official monthly GDP which also registered zero growth according to the Office for National Statistics (ONS).
Over the three months to January, headline GDP managed only a meager 0.2% rise, while annual growth slowed to 0.8%, the weakest since mid-2024, with output essentially flat since early 2025.
“Measurements of both official GDP and real economy output flatlined at 0% growth,” RSM UK economists Thomas Pugh and Jack Wellard wrote. “This means the UK economy goes into a potential energy-price shock with little margin to absorb it.”
Up and down sectors
Manufacturing output edged up 0.1% in January, helped by a 7.2% rebound in auto production recovering from earlier disruptions.
Construction gained 0.2%, largely from repair and maintenance work. Retail and wholesale activity rose a solid 1%, buoyed by stronger retail sales.
But services, a dominant part of the economy, were hit hard. Employment activities plunged 5.7%, rental and leasing fell 3.9% reflecting weak housing and labour markets, and food and beverage services dropped 2.7%, pointing to cautious consumers holding back on discretionary spending.
The timing is particularly poor for the UK which now faces a growing global energy crisis.
A potential energy crisis
Geopolitical escalation involving the US, Israel, and Iran has disrupted oil and gas flows, sending wholesale energy prices surging.
Oil benchmarks have climbed sharply, with concerns over supply routes like the Strait of Hormuz, while natural gas prices have spiked dramatically in recent weeks.
Analysts warn that prolonged high energy costs will squeeze energy-intensive industries, erode real household incomes, curb consumer spending, and push inflation higher – potentially toward or beyond 3% by the end of 2026 if the conflict drags on.
Even in a best-case scenario of swift resolution, RSM UK now expects full-year 2026 growth to come in below 1%, down from earlier forecasts around 1.2%.
A more sustained shock raises the spectre of stagflation: stagnant or negative growth paired with rising prices. The labour market is cooling , housing remains subdued amid planning bottlenecks and elevated mortgage rates, and businesses face uncertainty from both domestic headwinds and imported energy costs.
Some forward indicators offer faint hope however. RSM’s Credit Impulse measure shows total borrowing rising to 0.6% of GDP in January (from 0.4% the prior month), led by business lending at 0.4% of GDP. This could underpin quarterly growth of around 0.3% to 0.5% in Q1 – but only if energy headwinds don’t overwhelm it.
