UK real economy ends 2025 with mild recession

The UK economy stared down higher operating costs and uncertainties in 2025 to grow by around 1.3%.

However, for firms in the real economy − those that make, do and serve − uncertainty won out in a year of stop-start growth. The UK real economy shrank by 0.1% in two consecutive quarters in the second half of the year. It means the RSM UK Real Economy Barometer grew 1.2% for the year, falling just short of our 1.3% forecast.

This shows how public spending shored up UK output while headwinds blunted private sector growth. However, the real economy did beat last year’s growth of 0.8%.

Looking ahead, the 2026 UK Economic Outlook highlights another year of muddling through and growth at similar levels.

Last updated: 13 February 2026

The real economy grew 0.1% m/m in December, after surging 0.4% in November. However, it wasn’t enough to keep Q4 output from contracting by 0.1% and for the second consecutive quarter. This left the real economy in a very mild technical recession at the end of the year.

December’s 0.1% gain was driven entirely by services (+0.3%). Both construction (-0.5%) and manufacturing (-0.5%) saw output fall.

On the quarterly view, it was a slightly different story. Manufacturing output rose by 0.9% q/q, thanks to Jaguar Land Rover’s (JLR) production restart boosting activity across Q4.

But, construction had its worst quarter since 2021. It collapsed by 2.1% in Q4 with the Autumn Budget and planning uncertainty impacting activity. For services, the decline was more moderate. Output fell by 0.1% in Q4. While that leaves the sector roughly the same size as it was back in Q2, it repeats 2024’s pattern for the second half of the year where Budget uncertainty hampered the real economy leading to stagnating output.

On an annual view, we estimate the real economy grew 1.2% in 2025. That’s only a little below the 1.3% official GDP figure and a step up from 2024’s 0.8% growth. Overall, we’re not too worried about the real economy being in a technical recession. H2’s drop in output was driven in part by one-off factors and Budget uncertainty. Looking ahead, the real economy is likely to rebound in Q1.

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 1.3%).

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: 30 January 2026

UK household and business borrowing continued their post-Budget bounce-backs in December from October and November’s lacklustre levels.

The RSM UK Credit Impulse reveals total UK borrowing rose to 0.4% of GDP in December. That’s up from 0.3% in November on the three-month average measure.

The big story is that it was businesses driving growth in December. Shaking off the previous months’ pre-Budget uncertainties, UK firms’ borrowing rose to 0.2% from 0%.

Household borrowing, which had returned in November after a subdued October, dropped marginally to 0.2% of GDP from 0.3%.

Looking at the data on a single-month basis, borrowing fell to 0.7% of GDP in December from 0.9% in November. It still suggests borrowing in the real economy is rebounding strongly from October’s -0.3% low.

On an annual basis, new credit flows averaged 0.6% of GDP in 2025, up from 0.5% in 2024. That’s consistent with our view that UK economic growth would pick up to 1.4% in 2025 from 1.1% in 2024.

Looking ahead, we expect the flow of new credit to rise again in January. Surveys suggest a revival in business optimism at the start of the new year, while October’s weak data will drop out of the three-month average.

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: 13 February 2026

Financial conditions are currently at +1.4. While that’s a notch down from recent readings, the FCI is still close to all-time highs. This will support business investment and consumer spending over the coming quarters as real economy participants find access to credit easier to come by.

Looking at each element in turn, foreign exchange markets slipped to -0.1 from +0.2 because of increased volatility between the euro and sterling.

Equity markets are at +1.1. That’s down from +1.2, but conditions here remain strongly accommodative. The FTSE continues to edge up to new highs, gaining around 19% y/y.

Using our revised and improved methodology, money markets are at +0.9. While this is a drop from the +1.4 in our previous release and the original methodology, the updated methodology would have previously registered money markets at +0.9, so is in effect unchanged.

Bond markets are unchanged at +0.6, despite some big moves following speculation over Sir Keir Starmer’s leadership.

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.