US-Iran peace deal a boost, but growth in the real economy will stay subdued

The real economy contracted by 0.1% in April, a sharp slowdown from the 0.7% growth recorded in March. One-off factors, such as collapsing fuel sales after consumers loaded up in March, dragged on growth in April after the steady start to the year. Growth is likely to remain subdued, averaging just 0.1% per quarter over the rest of the year.

Despite the conflict in Iran and the increasing likelihood of an Andy Burnham government, financial conditions in the UK remain resilient and should remain be a modest tailwind to growth over the coming months. However, if tensions in the Middle East flare up, or a Burnham government looks set to raise borrowing by more than markets expect, the risk is skewed towards tighter fiscal conditions.

The Credit Impulse slowed in May but remains positive, suggesting households and firms do not plan to curtail borrowing in the face of rising uncertainty and higher inflation. That said, speculation over potential tax rises from a new government may mean the pace of borrowing slows further in the coming months, which will drag on consumption and business investment.

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

The real economy contracted by 0.1% in April, matching the decline recorded in the broader UK economy.

Not all sectors followed the broader trend. Manufacturing and construction output grew by 0.4% and 0.1% respectively, while hospitality output grew 0.5% month-on-month. The strength in hospitality was likely driven by the good weather, despite weaker consumer confidence.

However, some sectors experienced shard declines. Fuel sales collapsed by 10.2% after consumers loaded up on fuel in March to get ahead of price increases. Elsewhere, the impact of the conflict in Iran prompted arts and recreation activity to collapse by 4.3%. This was largely due to cancellations of major events in the Middle East, such as the Bahrain and Saudi Arabia Grand Prix, which disrupted broadcasts and UK-based teams. These one-off events should unwind in the coming months.

Looking ahead, growth is likely to slow further despite the signed US-Iran peace deal. Inflation will peak only a little below 3.5%, which will weigh on real household incomes and drag on demand. As a result, the real economy may have already experienced most of the growth it is likely to achieve this year.

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.

The pace that firms and households in the real economy took on new credit slowed from 0.4% of GDP to 0.3% in May. This suggests the economy is likely to have continued to grow through Q2, albeit at a subdued rate.

The slowdown was largely driven by businesses, where the pace of new borrowing slowed from 0.4% to 0.3%. That said, the fact that borrowing remained positive suggests firms are continuing to take on more credit despite ongoing uncertainty and the sharp rise in financial costs due to the conflict in the Middle East.

Elsewhere, household borrowing was unchanged from May 2025. This is reassuring, as it suggests consumers are borrowing at the same pace as a year ago despite higher mortgage rates and elevated uncertainty. In essence, consumers might not be taking on new credit, but they also weren’t cutting back on borrowing in response to the Iran war.

Further ahead, lower oil prices have helped reduce market interest rates, although they remain elevated relative to pre-conflict levels. This improvement in financial conditions should support economic growth in the coming months. However, uncertainty over domestic policy remains high as households and businesses assess what an Andy Burnham government might mean for taxes and borrowing costs. Endless speculation is likely to continue to weigh on borrowing activity in the months ahead.

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 have eased since our last update, rising from +1.1 to +1.5 standard deviations above normal. This largely reflects lower oil prices, which have helped reduce market interest rates.

The equity markets element of the FCI has risen from +0.5 to +1.0, driven by a sharp decline market volatility. The peace deal in the Middle East has helped reassure investors.

Money market conditions have also loosened slightly from +0.9 to +1.0. Banks have started to lend to each other at lower rates again, as expectations of rate hikes from the Bank of England fade.

The foreign exchange and bond market components remain broadly unchanged. Sterling remains stable against the euro and the risk premium on corporate debt showed little movement.

Altogether, financial conditions continue to provide support for economic growth. That said, the risks are tilted towards tighter financial conditions in the months ahead. In particular, concerns about increased government borrowing could push up market interest rates and crowd out private investment, weighing on financial conditions and growth.

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.