UK economy stabilises in Q2: what could Q3 hold?

The UK’s economic performance continues its 2025 rollercoaster ride. Relatively punchy growth in the first half of the year was met with economic stagnation at the start of the second half. Official GDP data for July saw the UK’s output match that in June, but deliver no more. However, it’s not as bad as it looks.

New business and household borrowing has risen as a proportion of GDP over the summer. Financial markets – including bond, stock and foreign exchanges – are also now at their most accommodating and least stressed this year. Both indicate some progress towards our forecast of 1.3% economic growth for 2025 as we head into Q4.

Do our latest UK economic indicators suggest economic expansion?

From a real economy perspective, July’s picture was even less positive than headline data suggests. The RSM UK Real Economy Barometer focuses on how the majority of UK businesses – those involved in the production, purchase and flow of goods and services – are faring in comparison to official GDP data. Here, our analysis shows output shrank by 0.2% in July, signalling a small retrenchment from gains earlier this year and lagging official UK GDP growth of 0%. This was not a surprise. As our latest UK economic forecast and analysis explores, growth will be harder to propagate as we head deeper into the second half of the year because of the ongoing impact of last Autumn Budget, April’s US tariffs and fragile business and consumer confidence.

Indeed, the RSM UK Credit Impulse – a forward-looking indicator of economic growth reflecting the appetite and ability of businesses and consumers to borrow – saw the three-month average flow of new credit to the UK economy steady at 0.6% of GDP in July. However, looking ahead, the one-month metric suggests Autumn Budget speculation could already be denting borrowers’ confidence.

To complete the picture for UK middle-market businesses, our Financial Conditions Index (FCI) posted a slight improvement as the FTSE 100 Index hit an all-time high and sterling regained lost ground against the euro. The increase to +1.3 from +1.2 – its highest level this year – reveals how August’s base rate cut and concerns over government borrowing are affecting the UK’s money, foreign exchange, equity and bond markets.

Our next set of indicators, published in October, will show how UK businesses, consumers and financial markets are navigating 2025 so far and the uncertainty ahead of Chancellor Rachel Reeves’s second Autumn Budget.

Until then, sign up to receive our regular economic updates, and read RSM UK Chief Economist Tom Pugh’s commentary of key datapoints, weekly Economic Voice briefings and our latest UK Quarterly Economic Outlook.

Last updated: 2 October 2025

The three-month average for the flow of new credit into the UK economy stabilised at 0.6% of GDP in August. This matches July’s figure and follows a gradual slowing in the rate of growth over the past few months.

Nevertheless, with Q2’s Credit Impulse measure standing at 0.4%, if households and businesses sustained August’s level of new borrowing into September, then that would mean the real economy continued its recovery into Q3 from tax and tariff rise headwinds.

Looking at the detail, this latest three-month average of new borrowing to the end of August was evenly split across households and businesses. Both continued to increase borrowing at around 0.3% of GDP. While this should be enough to support UK economic growth in Q3, it’d be at a slower pace than in the first half of the year.

However, there’s already signs Autumn Budget speculation is starting to weigh on activity. The single-month measure of new borrowing in August fell to 0.4% from 0.5% – the lowest since April. Further speculation could prompt new borrowing across the real economy to grind to a halt.

For now, new borrowing continues to point to solid economic growth in August, despite the prevailing headwinds from taxes, tariffs and now budget speculation.

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 %.

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Last updated: 26 September 2025

The real economy shrank -0.2% in July, compared to stasis (0%) in the official GDP figures.

Construction output grew 0.2% m/m as good weather continued to boost activity through the summer. However,  manufacturing– specifically, the volatile pharmaceuticals, electricals and chemicals sectors – suffered a 1.3% m/m fall. This knocked 0.12ppts off GDP growth in July and had an even bigger impact on our Real Economy Barometer measure.

The real economy’s services sector also stagnated in July. Business services contracted, in contrast to the 0.1% expansion in official services data. Here, public services, which our Real Economy Barometer excludes, saved July’s official output from contraction.

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.

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Last updated: 26 September 2025

Financial conditions have become more accommodative in recent weeks. This moves our FCI further into positive territory, rising to +1.3 from +1.1, and to its highest level so far this year.

Boosting the measure, the equities element edged up to +0.9 from +0.8. The 12% y/y increase in equity prices, up from 10% y/y at our last update, helped.

The money markets element also nudged higher to +1.4 from +1.3 as lower interest rates continue to support financial conditions.

Sterling recently reclaimed some lost ground against the appreciating euro, which takes the foreign exchange aspect of the FCI closer to neutral, at -0.1 from -0.2, while volatility remains low.

It was only the bond market component of the FCI that remained unchanged, at +0.5. The premium on corporate borrowing is still relatively benign and yield curves continue to steepen globally.

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.

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