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Is the UK facing a recession in 2026? Financial journalists discuss how it might happen
Mar 23, 2026
With unemployment at a five-year high, inflation above the Bank of England's target, and a war in the Middle East, could the UK enter recession in 2026?
Fears over a prolonged closure of the Strait of Hormuz have driven UK government borrowing costs to a high not seen since Liz Truss's mini-budget - meanwhile energy costs are expected to rise in the medium-to-long term.
City AM's Simon Hunt, Ali Lyon and Mauricio Alencar discuss how the UK might be affected.
#economy #recession #iran #inflation
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0:00
It's quite unprecedented today. It's
0:01
There will be a Cobra meeting which
0:03
viewers might know is, you know, it's
0:05
kind of an emergency meeting between
0:06
senior ministers. And actually the Bank
0:08
of England Governor, Andrew Bailey, will
0:10
attend, which doesn't really happen when
0:12
these Cobra meetings take place.
0:13
>> It's a bit of a murky world where we
0:15
don't have the kind of economic
0:17
statistics that we do have about about
0:18
other markets. There are all these
0:20
little connections to banks, to retail
0:22
investors, to
0:25
the wider financial ecosystem, so that
0:28
if you get two or three or four really,
0:30
really big collapses, then that could
0:31
spread into the wider financial system.
0:34
Energy prices are spiraling. Gilt yields
0:37
are soaring. Stock markets are slumping.
0:39
Unemployment is creeping up, and the
0:42
rate of corporate insolvencies is
0:44
eye-watering.
0:45
All of these statistics point to one
0:46
thing, the very real possibility of
0:49
recession. The British economy was
0:51
already in a precarious state before the
0:52
outbreak of war in Iran, with growth at
0:54
a standstill, but now, with energy
0:57
supply shocks and disruption to key
0:58
global trade routes, things are getting
1:01
ever more perilous.
1:03
But just how close are we to meeting the
1:05
conditions for the dreaded R word? And
1:07
what will this mean for businesses and
1:09
investors? I'm joined by CityAM's
1:12
politics and economics reporter,
1:13
Mauricio Alencar, and our chief
1:15
reporter, Ali Loyn.
1:17
Mauricio, we've had several economic
1:19
statistics published the last few days.
1:21
Of course, all of them relate to
1:23
February. That's the period before a war
1:25
broke out in Iran. They already showed
1:27
warning signs for the health of the UK
1:29
economy. Absolutely. I mean, this year,
1:32
you know, we we we turned the end of
1:34
last year was already quite low growth
1:36
figures, you know, we had that massive
1:38
shot up at this time last year before
1:41
Liberation Day. Then, as you year went
1:43
on,
1:44
economy started to wind down, and
1:46
unemployment starting to go above 5%.
1:48
Beginning of this year, it's not great.
1:50
It's, you know, 0.1% growth in January,
1:54
and unemployment is still very high.
1:56
It's stayed at 5.2%. Inflation is still
1:59
well above target. So, all the warning
2:01
signs are there, and with this crisis
2:04
coming, it's it's it could get a lot
2:06
worse before it gets better. Who knows
2:08
when it's going to get better.
2:10
>> Mhm.
2:10
And what are the sort of immediate
2:12
indicators we have as to how the events
2:14
in the Middle East of the past few weeks
2:16
are feeding through into the UK economic
2:18
data? I mean, I noticed that gilt yields
2:20
have really surged the past few days. I
2:22
think one of the things that were
2:23
striking in the last week was
2:25
I think earlier, you know, about a month
2:27
ago, Rachel Reeves, the Chancellor, was
2:29
talking about, you know, the prospect of
2:32
inflation coming down to 2%, the target
2:35
rate, from next month. And the Bank of
2:38
England last week, in its monetary
2:39
policy report, revised those forecasts,
2:42
and because of that, you know, more than
2:44
a 60% rise in fuel prices, actually
2:47
inflation will be about 3% or or higher
2:51
from next month. So, it's completely
2:52
canceled out those sort of big budget
2:54
measures that Rachel Reeves
2:57
did at the, you know, last year.
2:59
Those budget measures will still be felt
3:01
by some families, you know, through
3:02
household bills when the energy price
3:04
cap, you know, does come down by about
3:06
£117.
3:08
Obviously, the energy price cap will be
3:10
reset in July, and, you know, those
3:13
market movements will feed into that the
3:16
energy price sort of reset from the
3:18
middle of this year.
3:20
But, you know, the fuel prices people
3:22
can see at the petrol pump. People who
3:24
use heating oil in in rural communities
3:27
will certainly be feeling sort of the
3:29
pressure of those oil prices and gas
3:31
prices going up. You know, Brent crude
3:34
oil price
3:35
around $110 per barrel has, you know,
3:38
neared that $120 sort of threshold.
3:43
You know, it all depends now on what
3:45
happens between Israel and US and
3:48
Iranian regime, you know, whether energy
3:51
infrastructure can stop being targeted
3:54
in strikes, and whether the Strait of
3:55
Hormuz, you know, that's critical
3:57
stretch of water, can be opened up. You
4:00
know, for about a fifth of global oil
4:03
and gas supplies. Yeah, you mentioned
4:06
energy
4:07
sites and plants being targeted there.
4:09
It does feel as though there's been a
4:10
bit of a shift in the sentiment of
4:12
investors, analysts, economists in the
4:14
past week, from hoping that maybe what
4:16
was happening in Iran was just a
4:18
temporary thing, that markets could
4:20
recover from it fairly speedily, from
4:21
thinking actually now, even if the
4:23
conflict were to stop today, it's going
4:25
to have some pretty long-term damage. It
4:28
will take months before the supply of
4:29
energy goes back to normal levels now.
4:32
Yeah, we're at that point where
4:33
economists are now they're not looking
4:35
at how long the war is going to take
4:38
how long the war is going to go on for.
4:40
It's actually how long is the world
4:42
economy even be able to recover for.
4:45
You know, obviously that's sort of big,
4:47
one of the biggest sort of gas supplies
4:49
in the world already indicating that it
4:51
could take about four to five years
4:53
before it's able to to resume the
4:55
production levels that we'd seen before
4:57
the war.
4:59
You know, how much is that going to
5:01
impact gas prices, UK gas prices?
5:05
Obviously, there's
5:06
more talk about trying to, you know,
5:09
make take use of
5:11
the North Sea oil sort of supplies and
5:13
what whatever's left there. And Offshore
5:15
Energies UK, this lobby group, has put
5:17
out lots of different data points trying
5:20
to show that, you know, opening up those
5:23
licenses, which are currently blocked by
5:25
the government,
5:27
would be good for at least energy
5:28
security.
5:30
I mean, from a local point of view, I
5:33
think the government and Keir Starmer is
5:35
keen to emphasize that his focus is
5:37
solely on the cost of living crisis. So,
5:39
it's quite unprecedented today. It's
5:41
There will be a Cobra meeting which
5:43
viewers might know is, you know, it's
5:45
kind of an emergency meeting between
5:46
senior ministers. And actually the Bank
5:48
of England Governor, Andrew Bailey, will
5:50
attend, which I don't, you know, hasn't
5:52
really happened, doesn't really happen
5:53
when these Cobra meetings take place.
5:55
Think it happened during the financial
5:57
crisis
5:58
when Mervyn King was Governor of the
6:00
Bank of England. So, you can see that,
6:02
you know, given that Keir Starmer has,
6:04
the Prime Minister has
6:06
not sort of pushed the UK to you join
6:09
the war, at least that's what he says,
6:11
and how he views his participation in
6:13
the war. His focus on the response is
6:16
solely on the cost of living crisis.
6:18
Can an energy support package be sort of
6:21
rolled out to families? How much can the
6:23
government afford such a government
6:25
package?
6:27
Taxpayer-funded package, of course.
6:29
So,
6:30
you know, a lot of moving parts the
6:32
government has because of that energy
6:33
price cap only changing in July,
6:36
fuel duty only being unfrozen after
6:39
September. Government has a bit of time
6:41
to try and figure through some of its
6:43
response, but um
6:45
clearly it's sort of
6:46
the main concern is around the economy
6:49
and and prices, especially ahead of
6:51
crucial May May elections for the Labour
6:53
Party in one or two months. Mhm.
6:57
Um Ali, one one thing that doesn't get
6:59
talked about very much in this context
7:01
is the private credit market. Now,
7:03
that's partly because it's a bit of a
7:05
murky world where we don't have the kind
7:07
of economic statistics that we do have
7:09
about about other markets. Could you
7:10
tell us first of all a bit about what
7:12
the private credit market is, and what
7:14
some of the news flow that you've seen
7:16
come out of that market over the last
7:17
few weeks? Yeah, I think it's it's it's
7:19
safe to say that had there were there
7:22
not a war going on in Iran, there would
7:24
be something that
7:26
a lot more column inches would have been
7:27
spilled over over the last sort of three
7:30
or four weeks.
7:32
Um
7:32
To to to define what it is, I guess, it
7:35
is the credit or debt equivalent of
7:37
private equity. So,
7:40
a sort of investment fund will go to
7:42
high-net-worth investors or
7:44
institutional money and get
7:47
wrap up their investments into a fund,
7:50
and then rather than investing it into
7:52
companies like a private equity company
7:55
would invest in a high street UK store,
7:57
they would lend the money at sort of
8:00
previously agreed terms, and then, as a
8:03
result of those direct loans, hope to
8:06
make a return for their investors.
8:09
Now, a lot of their
8:11
loans are not only to the sort of
8:13
bog-standard SME space, but also to
8:17
private equity funds themselves, who are
8:20
looking to get some leverage on
8:23
their own investments, so that they can
8:25
get increased returns. Mhm. What's
8:29
what's quite interesting is we even had
8:31
the Bank of England recently say they
8:33
are concerned about the effect of the
8:36
private credit market, but at the same
8:38
time that they don't really know enough
8:40
about it to know how how how much they
8:43
should be concerned.
8:44
>> Yeah. Um so, is it that kind of opacity
8:47
that makes this such an an unknown
8:49
entity? You know, are we in the middle
8:50
of like a slow-motion car crash, or is
8:52
everything fine? So,
8:54
and and yeah. So, the
8:56
you're exactly right. There are two big
8:59
sort of
9:00
passages of thought that people are
9:02
currently coming down on. The first, the
9:04
optimists' case that you'll hear people
9:07
from private credit argue, is that each
9:10
investment that private credit makes is
9:13
is unique. It's sort of a bit like a
9:16
honeycomb, I heard it described to me a
9:18
little while ago, that if one pops, the
9:21
little honeycomb is isolated, and then
9:23
there are lots of other honeycombs that
9:25
will prove out to be good investments.
9:27
Whereas, what everyone who is in the
9:30
bear case is worried about is that there
9:33
are all these little connections to
9:34
banks, to retail investors, to
9:38
the wider financial ecosystem, so that
9:41
if you get two or three or four really,
9:43
really big collapses, then that could
9:45
spread into the wider financial system,
9:48
with runs on banks, with retail
9:50
investors pulling their money out of
9:52
their these private credit funds, and
9:54
that then that would spread into a wider
9:56
financial crisis.
9:57
>> Mhm. Absolutely something we should be
9:58
keeping an eye on over the next few
9:59
weeks, I think. Um Mauricio, is there
10:02
are there any grounds for optimism? Are
10:04
there any reasons to be cheerful? I
10:06
mean, I can think of a few reasons why
10:08
the prospect of a recession isn't
10:10
imminent. Um you know, one of the
10:13
reasons being as you mentioned when it
10:14
comes to the energy price uh spiral that
10:17
we've seen, actually consumers aren't
10:19
immediately exposed to that because
10:20
we've got the energy price cap which
10:22
isn't reset until July. A lot of
10:24
businesses will have fixed-term energy
10:27
contracts that are hedged for the next
10:30
year or two, which means they're not
10:31
immediately exposed to volatility in
10:33
energy prices. Uh and of course, we are
10:36
heading into the summer now where people
10:38
switch off their heating, where
10:39
businesses don't have to use as much
10:41
energy. So, if you had to time the
10:43
perfect time of the year for there to be
10:45
a energy crisis, heading into the summer
10:47
might be the best time.
10:48
All of that is spot-on. I'd I'd add one
10:50
more thing, which is the Bank of
10:52
England, you know, there's all these
10:53
sort of two-year gilt yields, which is
10:55
kind of, you know, where I guess you
10:58
could is where some economists say is
11:00
where markets are
11:02
betting on how many interest rates where
11:04
interest rates will be in two years.
11:06
That's already about four interest rate
11:08
hikes, you know, it's at 4.75%
11:12
um around around that mark today. Um
11:14
where that actually might not be as many
11:16
interest rate hikes is because of this
11:18
thing that economists call second-round
11:20
effects. So, effects effectively in
11:23
after 2022 and the energy price shock we
11:25
saw thereafter Russia's full-scale
11:27
invasion of Ukraine, the jobs market was
11:29
very hot. It was just after the
11:31
pandemic, you know, there were a lot
11:32
there were more vacancies and um you
11:35
know, I guess employees had more
11:37
leverage over their negotiations for
11:39
higher wage growth um in their in their
11:42
jobs. Right now, we're seeing the sort
11:44
of kind of opposite of that situation
11:46
where actually the number of vacancies
11:48
out in the jobs market is quite low. Um
11:51
employees, they're not stuck in their in
11:53
their in their companies, but you know,
11:55
they don't have that sort of power they
11:57
have they you know, they once had about
11:59
five years ago, four years ago over
12:01
their employer to negotiate higher pay.
12:04
Um so, you know, second-round effects
12:07
takes place where I suppose when there's
12:09
an inflation shock,
12:11
then sometimes, you know, employees
12:13
might be able to negotiate much higher
12:15
salaries, and then that can feed into
12:17
higher inflation because if firms have
12:19
to pass on those costs through to
12:21
products. And that, you know, that is
12:22
just sort of a double chain reaction.
12:25
Right now, because the jobs market is
12:26
quite weak, actually that inflation
12:28
might not spiral as quickly as possible.
12:31
So, as you know, as fast as we
12:34
once saw it, you know, when inflation
12:35
hit 11%. It's currently at 3%. The the
12:39
forecasts I've seen, even with oil
12:41
prices per barrel jumping up to $150 per
12:44
barrel, you know,
12:46
it's a
12:47
inflation mark of around 5 to 8% on
12:49
current forecasts I've seen, you know,
12:50
in my in in my emails. Um it's nothing
12:53
like the 11% which, you know, was also
12:57
um reduced through the energy support
12:58
package. Um the other thing I'd say is
13:01
there is a bit more headroom.
13:03
And okay, it's you know, some economists
13:06
might still not be happy with the amount
13:08
of headroom and the chances of the
13:09
Chancellor passing that headroom, but
13:12
you know, that headroom was built in
13:14
after last year. Um while the growth
13:16
forecasts were revised down, okay, the
13:19
OBR, the Office for Budget Budget
13:21
Responsibilities forecasts are slightly
13:22
higher still than some City economists.
13:25
Um but you know, with that sort of
13:28
higher headroom and with the fiscal
13:29
rules which are still sort of that these
13:31
three-year periods,
13:34
the Chancellor and the government would
13:35
argue that, you know, in the short term,
13:38
we are able to sort of turn the spending
13:40
taps on, borrow a bit more, you know,
13:43
provide the energy support package and
13:44
get through the shock. Obviously, that
13:47
means in the long term, if the
13:49
Chancellor is committed to fiscal rules
13:51
and she wants to keep that fiscal
13:53
headroom intact, we there there will be
13:56
spending cuts or tax rises. And
13:59
obviously, so far in this Parliament,
14:01
we've seen about 66 billion pounds of
14:04
tax rises. Um
14:06
government constrained by their
14:08
manifesto promises on income tax and
14:10
corporation tax on national insurance.
14:13
Um so, obviously, I think we're seeing
14:15
this shock emerge and let's say the Iran
14:18
war,
14:19
you know, comes to a close within weeks,
14:22
then it will become that sort of
14:23
political story, you know, where are the
14:25
tax rises going to be? Where will the
14:27
spending cuts will be? Education,
14:29
health, um those things that, you know,
14:31
the government promised to spend more
14:33
on. So,
14:34
you know, um it's it's we'll find the
14:38
bits of optimism. Obviously, AI could,
14:41
you know, really boost the UK economy,
14:43
help with productivity. Government's
14:45
also sort of doubling down on its kind
14:47
of regional investment. Um
14:50
But you know, there are so many also the
14:52
the the headwinds are are quite hard to
14:54
sort of battle against at the moment.
14:56
>> All right. Well, nice to end with at
14:57
least a hint of optimism there. Thank
14:59
you both very much for joining me. And
15:01
for all the latest economics news, head
15:03
over to cityam.com.
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