Iran crisis tests UK economy’s resilience in Q2

UK GDP defied expectations in February, growing 0.5% on the month. It means the UK economy entered the energy-price shock with slightly more momentum to absorb the impact than expected.

The UK Real Economy Barometer reflects February’s boost. After slipping into a mild recession at the end of 2025, activity among firms that make, do and serve picked up sharply in February. The real economy grew 0.6%, up from 0.1% in January.

However, beyond March, the path for growth is likely downwards. Households and firms will begin to feel the impact of the Iran crisis at filling stations and through rising costs. The Financial Conditions Index (FCI) and Credit Impulse give some signal of what to expect in the months ahead.

The latest Financial Conditions Index (FCI) measures stress in the UK’s financial system. It shows financial conditions returning to their pre-Iran crisis level of +1.4 after a period of volatility. This is better news for credit availability, which drives spending, investment and economic growth, but the overall reading is distorted by base effects from last April’s US tariffs. Indeed, financial conditions will likely tighten in the coming weeks if a permanent solution to the crisis isn’t reached.

In keeping with February’s GDP data, the Credit Impulse shows how since the Autumn Budget new business borrowing has been rebounding. The pace of new borrowing growth did slow in February. If geopolitical events dent this recovery in March, it would indicate a knock-on effect for UK growth later this year.

Read what this means for our forecast for the year in our latest quarterly 2026 UK Economic Outlook update.

Last updated: 21 April 2026

The real economy grew by 0.6% m/m in February − above the 0.5% recorded in official GDP data − reflecting how it was private sector firms fuelling this expansion. Growth in January was also revised up to 0.1% from 0%.

The jump was driven by the services sector, which grew 0.7% m/m. Part of this is the unwinding of January’s large falls. Admin activities rose 2% m/m in February after falling by 2.7% m/m in January.

But, there were still positive signs. Motor trades rose 2% on the month, suggesting that, before the Iran conflict derailed the UK economic outlook, consumers were becoming more willing to make big purchases.

Construction output finally rebounded too, growing by 1% m/m. That was despite heavy rainfall across much of the UK. Still, the broader picture is still one of output falling by 2% in the three months to February. Higher interest rates and energy prices will both also now weigh on the sector from here.

Manufacturing activity dropped by 0.1% m/m. It’s also far more susceptible to energy cost pressures going forward.

Further ahead, growth will slow as energy price inflation eats into real household incomes and pushes up firms’ input costs.

Real Economy Barometer explained

Real Economy Barometer explained

Providing clarity for business leaders operating in the UK’s real economy

The Real Economy Barometer more accurately describes the economic landscape as experienced by middle-market businesses.

Focusing on the UK’s goods- and service-producing sectors, it filters out certain public-sector components from official GDP data to provide business leaders with actionable insights.

How to use The Real Economy Barometer

We can better understand where growth is coming from, the factors influencing this and what it takes in the coming months to meet growth forecasts by comparing data for real economy output with official UK GDP.

Every month, following the release of official UK GDP data, our economists calculate how the real economy – accounting for 79% of the UK economy – is performing against the:

• UK economy’s total output
• our growth forecast (currently 1.2%).

Negative values show shrinkage in the size of the economy and positive values show growth.

How we calculate The Real Economy Barometer indicator

The Real Economy Barometer strips out the impact of imputed rents, public administration, education, human health, residential care, social work, libraries and museums, and social clubs from official GDP data.

Last updated: 1 April 2026

New borrowing in February dropped to 0.4% of GDP, down from 0.6% in January. This suggests the post-Budget bounce − after firms and households held off major financial decisions until the outlook was clearer − was already tapering before the crisis in Iran started to unfold in March.

Household borrowing fell to 0.1% from 0.2% − the level it’s held since October.

Business borrowing continued its three-month run of supporting the measure. It rose 0.3% in February, although this was down from January’s 0.4%.

On the single-month reading, borrowing was 0.2% in February, the same as in January.

Overall, the pace of new borrowing was moving in the right direction. However, conflict in the Persian Gulf is likely to weigh on sentiment in March. This would mean households and firms cutting back on borrowing for mortgages and capital projects as they wait for uncertainty and the hit to profit margins and incomes to fade before taking on more credit.

For comparison, after the 2022 energy price shock, our Credit Impulse showed the flow of new borrowing averaged -0.7% of GDP in 2023, compared to 0.1% in 2022. This is likely to repeat itself as households and firms slow the pace at which they take on credit.

Credit impulse explained

Credit impulse explained

Measuring the UK’s economic momentum

The RSM Credit Impulse is a real-time snapshot of new credit flowing into the UK’s private sector.

As a gauge of future economic momentum, it tracks both household and business borrowing, offering middle-market businesses insight into the direction of future growth.

How to use The RSM Credit Impulse

The RSM Credit Impulse gives you the ability to anticipate changes in the economic landscape.

It outlines capital investment and consumer spending intentions as a proportion of GDP.

• Positive values are a sign of good credit flows, investment and consumer confidence.
• Negative values suggest a tightening credit environment and caution in spending and investment.

How we calculate The RSM Credit Impulse indicator

The RSM Credit Impulse uses data from the Bank of England for lending flows and the ONS for nominal GDP. The change in lending flows is then calculated and divided by quarterly GDP to give a %.

Last updated: 21 April 2026

For now, financial conditions are proving resilient in the face of geopolitical uncertainty, even if the latest figures are flattered by base effects from last year's tariff shock. UK financial conditions overall have recovered to +1.4 on the Financial Conditions Index (FCI) after the dip to +0.9 as the Iran conflict unfolded.

The equity markets element of the FCI notched up to hit +0.8 after March’s +0.3 low on news of a ceasefire and peace talks. However, part of this improvement is due to a base effect. President Trump’s tariff announcements sent the FTSE tumbling this time last year. As this washes out, financial conditions will tighten again.

Money markets improved to +1.2 as they absorb liquidity. This partly reflects how public sector borrowing costs have risen by more than other market rates, likely because investors anticipate some additional government spending to limit the energy price shock’s impact. At the same time, the Monetary Policy Committee (MPC) is expected to leave policy unchanged in the near term, limiting how far swap rates rise.

At +0.5, bond markets are broadly unchanged from our last update, including the premium on corporate borrowing. But, both public and private debt have been repriced sharply upwards.

Foreign exchange markets are also unchanged at 0.0.

Financial Conditions Index explained

Financial Conditions Index explained

A real-time gauge of financial stress

The RSM Financial Conditions Index (FCI) is a powerful metric that monitors the level of financial stress in the UK’s money, bond, equity and foreign exchange markets.

It offers near real-time insight into financial market movements, helping business leaders to gauge how shifts might impact the broader economy and its stability.

How to use The Financial Conditions Index

The FCI shows exactly how far current financial conditions diverge from historical norms.

This means we can understand if current financial conditions are supportive of business growth, investment and consumer spending, or not.

• Positive values indicate more accommodating financial conditions and easier credit availability – prerequisites for economic expansion.
• Negative values indicate tighter financial conditions, less credit availability and higher costs – dampeners for investment, confidence and growth.

How we calculate The Financial Conditions Index indicator

Items included in the composite RSM UK Financial Conditions Index are normalised by subtracting the mean and dividing by the standard deviation for each series.

The FCI, as a Z-Score, indicates the number of standard deviations by which current financial conditions deviate from normal levels.