Is the UK heading for a recession?

Having grappled with low growth and stubborn inflation for months, could the UK economy finally tip 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.

The positive side of this is that it makes the UK, in the IMF’s view, the fastest growing European G7 country.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

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”.

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,” writes 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.

“The downside risks to UK GDP growth from the indirect impact of tariffs are growing,” writes Ashley Webb, UK economist at Capital Economics. “The risk is that there is a further escalation, contributing to a bigger hit to the global economy and the UK is caught in the crossfire.”

With all these trade barriers being erected, the fear is that global inflation could skyrocket, even as growth falls.

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 a recession?

Economists define an economic recession as two consecutive quarters of negative growth.

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

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. It might not take much, then, to push the economy over the line into contraction in the coming months.

How likely is a UK recession?

As things stand, the consensus among economists is that the UK will avoid a recession this year, albeit narrowly. 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.

According to the latest available figures, the UK economy grew by 0.5% in February, compared to 0.1% predicted by analysts. However, that surprise jump – with growth having flatlined the previous month – is expected to precede a difficult period for UK GDP, as new measures from the Autumn Budget come into effect.

These include higher minimum wages and increased employers’ National Insurance contributions, both of which economists fear could weigh on growth.

In February, the Bank of England revised its growth forecast for the UK economy in 2025 down to 0.75%, from 1.5%. That revision pre-dates the publication of Trump’s tariff regime, so the next Bank of England meeting – scheduled for 8 May – could see an update.

Other analysts that have seen the extent of the tariffs have, however, kept their UK growth forecasts for this year narrowly positive. Yael Selfin, chief economist at KPMG UK, forecasts 0.8% growth in 2025 and 2026.

Pantheon Macroeconomics expects Q1 GDP to be 0.1% stronger than the Bank of England’s February forecast predicted. “Business employment intentions improved in March, redundancies remain low, and jobless claims suggest only a gradually rising unemployment rate,” says Wood, noting also that consumers have helped drive growth since the Budget.

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.

That causes a headache for Reeves, who is grappling to get the UK economy growing with an ever-shrinking hand: borrowing costs, according to the latest ONS release, rose by £21 billion in the 2024/25 financial year.

“Rachel Reeves is between a rock and a hard place,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown. “While Reeves keeps deflecting rumours about tax rises, something will have to give, to enable her to meet her fiscal rules.”

Could the UK agree a trade deal with the US?

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.

“An invitation to meet the King led to some warm words from President Trump, which markets likely translate as a better chance of the UK negotiating away tariff impacts and avoiding retaliation,” says Wood.

Would a trade deal remove the chances of a UK recession, though? Wood goes on to point 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 writes.

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.”