Economic ripples from the Iran crisis start to land

The latest update to the Financial Conditions Index (FCI), which tracks stress in the UK’s financial system, shows tightening as the recent escalation in the Middle East heightens uncertainty. The FCI is down by 0.5, falling to +0.9 from last month’s +1.4 high.

While keeping the FCI in firmly positive territory, the downshift shows how equity markets in particular are being impacted by the prospect of another energy price shock. The FTSE 100 lost 6% in the week after the conflict started. Another factor is rising private sector lending rates. This affects firms looking to borrow for investment.

As our Credit Impulse shows, new business borrowing since the Autumn Budget has been rebounding. If financial conditions dent this upturn, it could have a knock-on effect for UK growth. Looking at the latest official GDP data, our UK Real Economy Barometer shows firms that make, do and serve already experienced a mild recession as 2025 ended. The real economy shrank by 0.1% in two consecutive quarters, while UK government spending kept official GDP in positive territory. However, signs are this will improve in the next set of figures.

Read what this means for the 2026 UK Economic Outlook when we publish our regular quarterly update at the end of March. Until then, follow the latest economic headlines.

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: 5 March 2026

UK new borrowing continued its post-Autumn Budget rebound in January.

The RSM UK Credit Impulse – a forward indicator of UK economic growth – reveals total UK borrowing increased to 0.6% of GDP in the first month of 2026. That’s up from 0.4% of GDP in December on the three-month average metric. It supports our forecast for Q1 GDP growth of around 0.5%.

For the second month in a row, it was new business borrowing driving the UK Credit Impulse. This element rose to 0.4% of GDP in January from 0.2% in December.

By contrast, household borrowing held steady in January. Growing at a still positive 0.2% of GDP on the three-month average, this figure is broadly unchanged since October and reflects the “lower and slower” narrative of our UK Economic Outlook 2026.

On the more volatile single-month gauge, there were some signs of normalisation after November and December’s punchy data (0.9% and 0.7% of GDP, respectively). New borrowing dropped to 0.2% of GDP, but this number was driven entirely by firms’ activity, reinforcing the picture of more positive business sentiment at the start of the year.

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: 11 March 2026

Taken after the rapid escalation of hostilities in the Middle East, the latest reading on our Financial Conditions Index is +0.9. This is materially lower than the +1.4 in the February update. It shows how the conflict in Iran and its associated uncertainty will impact the UK economy through weaker financial conditions.

The fall in the FCI is largely driven by a sell-off in equity markets and heightened volatility as investors recalibrate and assess the situation. This means cash will flow out of riskier assets into safe havens. Private sector lending rates also jumped by more than three-month Treasury bills in recent weeks, making borrowing for businesses more expensive.

- Equity markets: +0.6 (down from +1.1)

- Money markets: +0.5 (down from +0.9)

- Foreign exchange markets: 0.0 (up from -0.1)

- Bond markets: +0.4 (down from +0.6)

Overall, financial conditions remain in accommodative territory. However, as conditions tighten due to the conflict in Iran this will weigh on growth in the UK. We saw this at the start of the 2022 Russia-Ukraine crisis when the FCI reached a trough of -1.9 (although this was exacerbated by the mini-budget).

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.