Real economy resilient to energy shock, but growth to slow towards end of year

The real economy has weathered the initial impact of the energy shock well, growing by 0.2% in August, following an already strong first half of the year. However, the risks are still skewed towards slower growth in Q4 as higher energy prices and elevated market interest rates weigh on activity.

UK financial conditions remain resilient but are less accommodative than earlier this year which suggests that growth will slow to a more subdued pace in the coming quarters. What’s more, rate hikes from the Monetary Policy Committee mean financial conditions could materially tighten in the months ahead.

The Credit Impulse improved in September, consistent with continued growth over the coming quarters, albeit at a subdued pace. That was driven by rebounding business borrowing despite elevated uncertainty, higher market interest rates and squeezed margins from higher energy prices.

Read the full forecast for the year in our latest Economic Outlook.

UK real economy grows 0.2% in August, outpacing the broader economy

The real economy has weathered the first six months of the energy shock well, growing by 0.2% in August compared to 0.1% in the broader UK economy. Indeed, the real economy has grown 2.5% in the year to August, the strongest since 2022 when the economy was still recovering from the pandemic.

The big drivers of growth in August were the retail and wholesale trade which jumped 2% and a 1.2% bounce in manufacturing. The former was primarily driven by retailers who were recovering from a weak summer, but manufacturing looks to have genuine momentum rather than output just being boosted by front-running of potential supply shortages.

Elsewhere, professional services activity jumped by 1.5%, contributing 0.14 percentage points to GDP growth, although this was offset by declines in IT and administrative services. More importantly, these sectors have grown by an average of 0.8% per month since the conflict in Iran began, up from just 0.1% in 2025. That sharp pickup has been a key driver of the UK's stronger-than-expected growth this year.

Ultimately, the real economy has weathered the initial energy shock well and has some genuine momentum. However, the risks are still skewed towards a slowdown later this year. Rising inflation, a weak labour market and persistent uncertainty mean that real income growth will likely turn negative and consumers will hold back on major purchases.

Real Economy Barometer explained

The 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.

UK Credit Impulse improves a little, suggests economy can keep growing

The flow of new credit to the real economy improved in September, from 0.0% of GDP to 0.1%, as consumers and firms continue to borrow a little more to support spending and investment despite the squeeze on real incomes and margins from higher inflation. At 0.1% our credit impulse remains consistent with a subdued pace of growth through the final months of the year, but there’s still little sign of activity collapsing.

New business borrowing improved negative from -0.1% of GDP to 0.1%, the highest since May which suggests that strong business investment so far this year can continue to support growth despite persistent uncertainty and higher market interest rates curbing some firms’ appetite to take on more debt.

The household component of our indicator eased from 0.1% to 0.0%. That suggests households are borrowing at a similar rate to last year. A steady pace of borrowing from consumers suggests that consumer spending will slow in Q4 from its strong 0.5% per quarter growth in the first half of the year, but the economy won’t contract either.

In any case, the tougher challenge still lies ahead inflation is set to peak around 4.5%, meaning real incomes stagnate or even turn negative. As those pressures build, households may begin to pull back on spending. That means growth will slow towards the end of the year and remain subdued through the start of 2027.

All told, the rise in new credit flows suggests that the economy will continue to eke out a little more growth in 2026 albeit at a more subdued pace. We then think growth will slow a little in 2027 as higher borrowing costs, sticky inflation and elevated uncertainty all drag on activity.

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 %.

Financial Conditions Index eases to +0.8 Standard Deviations, suggests slower growth

Financial conditions have eased back a little in recent weeks from +1.3 deviations above normal at its recent September peak to +0.8 currently.

The big driver of the tightening in financial conditions has been the tightening in the money markets as financial markets have priced in more rate hikes from the Bank of England in response to the latest jump in energy prices. The result is that conditions in money markets have gone from accommodative just a few months ago to neutral now.

At the same time, the selloff in global bond markets, which the UK pays a premium in relative to peer countries, means that the bond market is now dragging on overall financial conditions.

Indeed, the sharp jump in yields has already raised financing costs for mortgages and corporate credit in the real economy, which is likely to dampen consumer spending and business investment in the coming quarters.

This leaves the equity market doing much of the heavy lifting. Indeed, volatility remains somewhat subdued, and the FTSE 100 is up by around 10% over the past year. Even so, equity market conditions are less accommodative than they have been through much of the last year.

Taken together, financial conditions remain accommodative and continue to support growth, but the degree of support is diminishing. Tighter money and bond markets suggest conditions could tighten further in the weeks ahead as the Bank of England follows the Fed and ECB in raising rates.

This reinforces our view that the strong growth recorded through the first three quarters of the year is likely to ease to a more subdued pace towards year-end as higher financing costs weigh on investment and intensify the squeeze on consumers as mortgage rates reset higher.

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.