What could cause a UK recession?

The UK is grappling with stagnant growth and stubborn inflation, but will it tip over into recession?

The latest World Economic Outlook from the International Monetary Fund (IMF) expects UK growth to slow to 1.1% this year, down from 1.6% last year.

Chancellor Rachel Reeves interpreted this as a recognition from the IMF that “this government is delivering reform which will drive up long-term growth in the UK”.

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This takes place against a challenging global backdrop. The IMF has downgraded the global economic outlook in light of what its report calls “effective tariff rates [at] levels not seen in a century and a highly unpredictable environment”.

“President Trump’s “Liberation Day’ tariff salvo has upended the global trading environment, leading forecasters to slash their projections for global economic growth, and sending ruptures through financial markets,” said Robert Wood, chief UK economist at Pantheon Macroeconomics.

While the UK was placed on the baseline rate of 10% on all its US exports, the interconnected nature of the British economy could mean that the disruption to global trade leads to a UK recession. Trade barriers could also see global inflation could skyrocket, even as growth falls.

This is set against a historical trend whereby the UK has struggled to return to the growth levels it regularly posted before the global financial crisis (GFC) in 2008.

“Moving forwards, we expect potential output growth to remain well below pre-GFC norms,” said Andrew Goodwin, chief UK economist at Oxford Economics. While Goodwin expects the impact of one-off shocks like Brexit and Covid to fade, this is set against the headwind of an aging population.

Entering a recession would be bad news for the UK economy. However, it is far from guaranteed, and there are steps that can be taken in order to protect your assets from recession.

What is the meaning of ‘recession’?

The definition of a recession according to economists is two consecutive quarters of negative growth.

economy contracted by 0.1% during Q3 and 0.3% during Q4.By this definition, the UK endured a mild recession in the second half of 2023, when the

The last major recession in the UK was during the first half of 2020, brought on by the onset of the Covid-19 pandemic and subsequent lockdowns. While brief – the contraction only lasted two quarters – it was severe; the economy shrank 2.6% in Q1 of 2020 and 18.8% in Q2.

Since then, the UK economy has been fairly stagnant, but mostly in positive territory besides the late Q2 dip (and a 1% contraction during Q1 2021).

However, growth slowed at the end of 2024. GDP grew 0.1% during Q4, and was flat during Q3.

How likely is a UK recession?

As things stand, the consensus among economists is that the UK will avoid a recession in 2025, albeit narrowly. The UK economy grew by 0.7% in the first quarter, so it would take two consecutive quarters of negative growth from here for the country to have entered recession.

However, Q2 has got off to an inauspicious start, with the latest figures showing that UK GDP fell 0.3% in April.

The month – dubbed ‘awful April’ – saw a raft of changes announced in the Autumn Budget take effect. These include higher minimum wages and increased employers’ National Insurance contributions, both of which economists fear could weigh on growth.

At the latest Bank of England base rate meeting the Bank forecast that quarterly GDP growth would be around 0.25% in Q2.

But some experts believe that this is overly optimistic. Wood expects growth of 0.2%, but points out that some indicators such as the average PMI suggests no GDP growth in Q2.

That view is under constant revision in light of the tariffs, though. A US recession would be bad news for the UK if it happens, and even being on the “right” side of the tariff regime can’t protect the UK against a shrinking US or global economy.

Other analysts are keeping their UK growth forecasts for this year narrowly positive. Yael Selfin, chief economist at KPMG UK, forecasts 0.8% growth in 2025 and 2026.

That’s not to say that the UK couldn’t experience two quarters of negative growth this year, and analyst forecasts can often be proved wrong regardless. However, the balance of forecasts currently available suggests that this won’t be the case.

There’s no getting around the fact, though, that UK growth is likely to be slow, as reflected in the IMF’s latest outlook. Slower growth means lower tax receipts.

How is the UK-US trade deal progressing?

In May, the outline of a potential UK-US trade deal was announced, which would lower the tariffs on some of the UK’s car exports to the US from 25% to 10%. Parts of this deal were implemented in June.

The deal retains 10% tariffs on most UK exports to the US as well as 25% tariffs on certain goods such as steel and aluminium. If no agreement is reached by 9 July, that levy could double to 50%.

Prime minister Keir Starmer has repeatedly stated that he will only agree a trade deal with the US if it is in the national interest to do so.

Given the implications of the tariff regimes that the US has put in place, though, it seems likely that agreeing one is high on Starmer’s agenda.

Would a trade deal remove the chances of a UK recession, though? Wood points out that the UK’s economy is quite closely correlated with the US economy, as well as with global trade, with total trade accounting for 60% of GDP.

“The UK is exposed to a global slowdown… Larger-than-expected US tariffs will hurt GDP growth more than previously assumed, blowing back onto the UK relatively more than elsewhere,” he said.

How should you invest in the event of a UK recession?

In the face of short-term volatility and the risk of a recession, experts are recommending that British investors stick to the general principles of long-term investing in order to protect their capital.

Rob Morgan, chief investment analyst at Charles Stanley, suggests diversification and avoiding vulnerable businesses (such as those with lots of debt or whose industries are closely tied to the economic cycle, or that are in any way speculative) in favour of ‘inevitables’ – “good quality businesses… offering a unique proposition, dominating market share through a superior product or unparalleled channels of distribution”.

He also suggests resisting the temptation to try to time the market. “Many investors obsess over exactly when to invest, but trying to time the market is usually a losing battle. A recession can cause volatility in prices, but there’s no knowing when the low point will come – or if it has already passed.”

Investors can also consider allocating to defensive assets like gold or government bonds.

“Gold is already at record highs thanks to the uncertainty injected into financial markets this year,” says Ed Monk, associate director, Fidelity International. “The metal tends to perform best when fear is at its highest and has a track record of holding its value when other assets are vulnerable to falls.”

On bonds, Monk adds: “High-quality government bonds begin to look very attractive when returns from riskier assets, like shares, are in question. Unlike corporate bonds - those issued by companies - that face a raised risk of default during a recession, government bonds carry very low default-risk.”