Is the UK heading for a recession and what does it mean for your business?

Recession is one of those words that tends to stop business owners in their tracks and right now, it is being mentioned more and more in the press and conversations with clients.

It is easy to understand why the fear persists, given the uncertainty that the UK and global economy is currently facing.

According to iwoca’s latest SME Expert Index, recession fears among small businesses are now at their highest point since Q3 2023.

The warning signs of a recession

The survey carried out recently by funding platform iwoca found that 54 per cent of finance brokers say their SME clients are worried about a recession. This is up sharply from 42 per cent of brokers who reported fears of a recession in Q4 2025.

It is not hard to see why. The same research highlights a cluster of pressures bearing down on small businesses simultaneously:

• 54 per cent of brokers cite running costs as SMEs’ number one concern
• 70 per cent say SME clients are worried about rising energy prices
• 78 per cent expect supply chain disruption to negatively impact small businesses

While we are not at the same levels of high inflation seen in recent years, CPI inflation is currently at 3.4 per cent, which is above the Bank of England’s two per cent target.

The rate of inflation is expected to remain at above three per cent until the end of 2026, with it potentially rising in the months ahead, before falling again.

However, what the rate of inflation will be later in the year is less certain, as it will largely depend on geopolitical issues outside of the UK Government’s control.

Are we actually in recession?

Despite the fears of many that an economic downturn is just around the corner, the reality is that the UK is currently not in recession.

A recession is defined as two consecutive quarters of negative GDP growth. The UK has not yet met that definition, but the direction of travel, such as slowing growth, persistent inflation, rising costs and weakening consumer and business confidence, is causing understandable concern.

What we are seeing more closely resembles stagflation, which is a difficult combination of sluggish growth and stubborn inflation that makes the Bank of England’s job extremely difficult.

Raising rates to curb inflation risks further choking growth but cutting them risks letting inflation run hotter for longer.

What SMEs can do right now

During times of economic uncertainty and challenging economic cycles, the businesses that tend to weather them best are those that act early, plan carefully and keep a very close eye on their numbers.

Here is what we would recommend given the current situation:

• Get a clear picture of your cashflow – It’s a cliché, but nevertheless one that often rings true – cashflow is king in a downturn. Review your forecasts, understand when payments are coming in and going out and identify any gaps before they become problems. If you are not already using cloud accounting software to track this in real time, now is the time to start.
• Review your costs without cutting corners – With running costs at the top of every SME’s worry list, it is worth doing a thorough review of your overheads. Are there supplier contracts worth renegotiating? Are subscriptions that are no longer earning their keep? Could your energy contracts be reviewed? You may not be able to make a single, large saving, but smaller savings across multiple areas can quickly add up.
• Don’t ignore tax planning opportunities – Uncertain times are precisely when proactive tax planning pays dividends. You should explore your eligibility for R&D tax credits and capital allowances, which could reduce your Corporation Tax bill. A conversation with your accountant now could help to free up cash or support further investment.
• Keep talking to your advisers – Don’t wait for issues to fix themselves or bury your head in sand. We speak with clients regularly and in uncertain periods we actively increase these touchpoints, because early conversations lead to better outcomes.

Looking ahead

A recession is not inevitable, but it would be foolish to dismiss the risks entirely. Even if the UK does not enter a period of recession, then there are still difficulties to face in the weeks and months ahead for many businesses.

The most important thing any business owner can do right now is stay informed, stay close to their advisers and resist the temptation to sit on their hands.

Concerned about what the current economic outlook means for your business? Get in touch with our team today for a no-obligation conversation.