Iran crisis means Real Economy has already had all of the growth it will get in 2026

The Real Economy grew by 0.9% in Q1, rebounding from a 0.1% contraction in Q4, which means the private sector entered the energy-price shock with strong momentum, but this is unlikely to last.

However, beyond March, the path for growth is likely downwards. Households and firms will begin to feel the impact of the Iran crisis at petrol stations and household bills which will dampen real income growth and in turn weigh on activity.

Financial Conditions have so far been resilient to the crisis, but have tightened due to the risk of higher inflation and less fiscal restraint from any potential replacement to Sir Keir Starmer. We expect conditions will tighten further over the coming months as the MPC is potentially forced to hike rates and the increasing likelihood of a messy, prolonged leadership contest increases speculation over a more spendthrift government.

The Credit Impulse continued to slow in March, but much of the slowdown in household borrowing was driven by a base effect due to strong borrowing last year ahead of stamp duty changes. In any case, geopolitical events will mean borrowing slows further this year and in turn so will growth.

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

The real economy grew by 0.9% in Q1 − above the 0.6% recorded in official GDP data – as private sector firms recovered from another period of budget chaos at the end of last year that left the real economy contracting by 0.1% in Q4 last year.

On a single month basis, growth was 0.7% in March, more than double the official GDP figures as businesses and households front-ran fuel purchases and got orders out ahead of potential supply shortages.

Indeed, consumers were relatively unphased by the first month of the Iran war, with hospitality output and arts and recreation output both surged. Retail sales also jumped by 0.7% although this was driven by fuel purchases and will unwind in April.

Looking ahead, another bout of stagnation seems inevitable. Higher energy prices will drag on real incomes and squeeze margins while another bout of political drama will weigh on activity throughout the 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 of new borrowing, while still positive, slowed to 0.2% of GDP in March from 0.4% in February.

The drop was driven by households, where the pace of new borrowing declined to -0.2% of GDP. That said, the credit impulse compares borrowing to the same time a year ago, which is when households were loading up on mortgage debt ahead of changes to stamp duty. In fact, on a monthly basis households borrowed £6.3bn in March compared to £5.5bn in February.

In any case, business borrowing held at 0.4%, the strongest since October 2024, suggesting that business investment has rebounded from a big 2.5% q/q drop at the end of last year.

Overall, the pace of new borrowing continued to slow in March. However, conflict in the Persian Gulf is likely to weigh on sentiment in the coming months. 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 %.

Financial conditions have tightened since our last update, dropping to +1.1 from +1.4 as markets reprice for another year of stagflation and concerns around a new, more spendthrift government ramp up.

The equity market element of the FCI has dropped to +0.5 from +0.8 and will likely tighten further in the coming months as the past year of strong FTSE growth comes to an end thanks to higher inflation and persistent uncertainty.

Money markets have also tightened sharply to +0.5 from +1.2 as the interest rates that banks lend to each other have moved up on the expectation of rate hikes from the Bank of England in the coming months.

FX markets have dropped to -0.1 from 0.0 as Sterling depreciates due to concerns over the latest Westminster psychodrama that could result in a more spendthrift government that could damage the UK’s fiscal credibility. Surprisingly, our measure of the bond markets has improved to +0.7 from +0.5 but this is in part driven by a narrowing spread between the premium on private sector debt and public sector debt as markets price in a potential loosening of fiscal policy.

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.