{"id":45718,"date":"2026-01-14T14:54:19","date_gmt":"2026-01-14T14:54:19","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-uk\/?p=45718"},"modified":"2026-06-05T18:54:50","modified_gmt":"2026-06-05T18:54:50","slug":"perspective-how-likely-is-a-recession-in-2026","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-uk\/insights\/perspective-how-likely-is-a-recession-in-2026","title":{"rendered":"How likely is a recession in 2026?"},"content":{"rendered":"\n<p><a href=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/our-people\/paul-danis\">Paul Danis<br><\/a>Head of Asset Allocation<br>RBC Brewin Dolphin<a href=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/our-people\/paul-danis#marketoform\"><\/a><\/p>\n\n\n\n<div class=\"well b-blue-tint-4 mb-3\">\n<h2>Key highlights<\/h2>\n      <ul class=\"list-spaced\">\n        <li>\n          <strong>Late-cycle risks: <\/strong> The U.S. and UK are in late-stage economic cycles with limited scope for growth &#8211; unemployment is near \u2018full employment,\u2019 and labour participation is plateauing.\n        <\/li>\n        <li>\n          <strong>AI\u2019s double-edged sword: <\/strong> AI could boost productivity but faces adoption uncertainties; the UK lags with just 0.2% annual productivity gains forecast from AI.\n        <\/li>\n        <li>\n          <strong>Recession verdict: <\/strong> A 2026 downturn is unlikely as the base case, but shocks (e.g. inflation spikes, conflicts, and trade wars) could upend this outlook.\n        <\/li>\n      <\/ul>\n    <\/div>\n\n\n\n<p>2025 was a strong year for investors across major markets. But it was also a year where talk of recession ramped up, prompting many of our clients to ask: <em>What are the chances of recession in 2026?<\/em><\/p>\n\n\n\n<p>Before addressing these concerns, let\u2019s clarify what a recession entails. Technically, it\u2019s defined as a significant, prolonged downturn in economic activity, usually measured by two consecutive quarters of negative gross domestic product (GDP) growth. Now, let\u2019s explore the key questions shaping the recession outlook for 2026.<\/p>\n\n\n\n<h2 id=\"h-why-do-recessions-matter\" class=\"wp-block-heading\"><strong>Why do recessions matter?<\/strong><\/h2>\n\n\n\n<p>Recessions hit close to home. They often mean job losses and insecurity, weaker business growth, and a fall in stock values. For context, the S&amp;P 500 equity index has declined by an average of 36% around the eight U.S. recessions that have occurred since 1970. With stakes this high, understanding the risks is important.<\/p>\n\n\n\n<h2 id=\"h-where-are-we-in-the-economic-cycle-at-present\" class=\"wp-block-heading\"><strong>Where are we in the economic cycle at present?<\/strong><\/h2>\n\n\n\n<p>An economic cycle describes the recurring pattern of GDP growth accelerating, slowing and contracting around a trend rate over time. We believe that most economies &#8211; including the UK and U.S. &#8211; are in the later stages of the economic cycle. This is because there\u2019s limited spare capacity that can be employed to drive growth. For example, unemployment rates are close to what economists believe to be \u2018full employment\u2019 and labour force participation rates are probably not going to rise much further. Economies can continue to expand from \u2018structural\u2019 growth \u2013 namely labour force and productivity growth. But there doesn\u2019t appear to be much scope for \u2018cyclical\u2019 growth.<\/p>\n\n\n\n<h2 id=\"h-what-s-the-outlook-for-structural-economic-growth\" class=\"wp-block-heading\"><strong>What\u2019s the outlook for structural economic growth?<\/strong><\/h2>\n\n\n\n<p>In the U.S., the Trump administration\u2019s immigration clampdown is holding back labour force growth. However, productivity gains from rising AI adoption could offset this.<\/p>\n\n\n\n<p>The UK faces similar challenges, with slower immigration growth reducing labour force growth. AI adoption should support productivity, but there are uncertainties about how quickly and the magnitude of its impact. For instance, the Office for Budget Responsibility expects just a 0.2% annual productivity boost from AI over the next five years.<\/p>\n\n\n\n<p>While there are moving parts, our sense is that for now, we won\u2019t see much change in the potential growth rate of economies like the U.S. and UK over the next several years.<\/p>\n\n\n\n<h2 id=\"h-how-are-monetary-and-fiscal-policies-impacting-the-economy\" class=\"wp-block-heading\"><strong>How are monetary and fiscal policies impacting the economy?<\/strong><\/h2>\n\n\n\n<p>Falling interest rates tend to boost economic growth via multiple channels, not least by encouraging borrowing. Greater government deficit spending (lower tax and higher spending) can also boost growth, provided it doesn\u2019t spark an overly sharp rise in interest rates (the 2022 Liz Truss mini-budget is an example of that backfiring).<\/p>\n\n\n\n<p>Interest rates have fallen from recent highs in both the U.S. and UK, supporting economic growth. Our view is that long-term interest rates and bond yields are probably not going any lower in the U.S., but they have scope to decline a little further in the UK as inflation converges lower with most other developed economies.<\/p>\n\n\n\n<p>On the fiscal front, the Republicans passed a large package of measures in mid-2025. This primarily extended expiring tax cuts and slashed Medicaid and other spending, limiting its growth impact.<\/p>\n\n\n\n<p>In the UK, the Labour Party outlined an <a href=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/insights\/uk-autumn-budget-2025-how-will-it-impact-your-finances\">Autumn Budget<\/a> that\u2019s set to boost government spending over the next few years, funded by tax rises in later years. We don\u2019t expect the measures to meaningfully change the trajectory of the UK economy, but the positive reaction to the Budget from the UK bond market (gilt yields fell) should provide some moderate support to growth.<\/p>\n\n\n\n<h2 id=\"h-what-about-the-impact-of-tariffs\" class=\"wp-block-heading\"><strong>What about the impact of tariffs?<\/strong><\/h2>\n\n\n\n<p>Tariffs can provide short-term protection to certain domestic industries, potentially boosting output. However, these benefits come at a cost: higher prices for consumers and businesses, reduced competition, distorted global supply chains, and reduced economic efficiency. Elevated prices in the U.S. also reduce the extent to which the Federal Reserve can cut interest rates.<\/p>\n\n\n\n<p>The impact of tariffs on global growth has been weaker than many economists feared, so far at least. This reflects President Trump\u2019s softened stance and limited retaliation from U.S. trade partners. Nonetheless, the situation warrants close attention.<\/p>\n\n\n\n<h2 id=\"h-are-recent-credit-market-wobbles-cause-for-concern\" class=\"wp-block-heading\"><strong>Are recent credit market wobbles cause for concern?<\/strong><\/h2>\n\n\n\n<p>Commercial bank lending to what are called non-depository financial institutions (such as private credit funds) has surged over the past decade. It\u2019s against this backdrop that the bankruptcies of auto parts supplier First Brands, and subprime auto lender Tricolour have spooked investors.<\/p>\n\n\n\n<p>First Brands primarily relied on private debt markets to borrow, but banks including Jefferies and UBS built up large exposures to its invoice-linked financing. Following the news, Jamie Dimon warned that \u201cwhen you see one cockroach, there are probably more\u201d. Shortly afterwards, Andrew Bailey set off further alarm bells, drawing parallels between what was going on during the Global Financial Crisis of 2008. When the JP Morgan CEO and Bank of England governor make comments like these, we should take the risks seriously.<\/p>\n\n\n\n<p>That said, there are several reasons to be cautiously optimistic that we aren\u2019t on the cusp of a new credit crisis. Private sector balance sheets are healthy, banks are well capitalised, and lending standards remain prudent across most loan categories.<\/p>\n\n\n\n<h2 id=\"h-what-sort-of-developments-would-concern-you-that-recession-risks-were-rising\" class=\"wp-block-heading\"><strong>What sort of developments would concern you that recession risks were rising?<\/strong><\/h2>\n\n\n\n<p>Recessions are driven by a contraction in consumer spending and\/or business investment. Several developments could cause this to occur. A key risk is that inflation remains stubbornly high, which would limit the extent to which central banks are willing to cut interest rates, or worse, prompts them to raise rates anew.<\/p>\n\n\n\n<p>There are signposts we monitor that have historically provided advance warnings of a recession:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Credit spreads<\/strong> (the difference between corporate and government bond yields) often widen ahead of a recession, as traders become worried about rising default risk. While credit spreads are off their cycle lows, the widening has been minimal.<\/li>\n\n\n\n<li><strong>Yield curve<\/strong> slopes (the difference between long-term and short-term government bond yields) usually narrow or flatten to signal rising risks. At present, yield curve slopes in most bond markets have widened\/steepened, which is encouraging.<\/li>\n\n\n\n<li><strong>AI-related investment<\/strong> has been a big driver of growth this cycle, but a slowdown would alter that trajectory \u2013 we\u2019re monitoring this closely. &nbsp;<\/li>\n\n\n\n<li><strong>Economic feedback loop <\/strong>\u2013 normally, economic expectations drive the equity market. But the order can sometimes reverse. If stocks drop sharply (say, over valuation concerns), the resulting confidence and wealth effect (where investors consume more when asset prices rise and vice versa) could spark a recession.<\/li>\n<\/ul>\n\n\n\n<h2 id=\"h-so-are-we-going-to-get-a-recession-in-2026\" class=\"wp-block-heading\"><strong>So, are we going to get a recession in 2026?<\/strong><\/h2>\n\n\n\n<p>Despite the lack of room for cyclical growth and the risks stemming from higher tariffs, we <strong>don\u2019t see a recession in 2026<\/strong> as a base case scenario. Here\u2019s why:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Inflation and interest rates have moved lower<\/strong>.<\/li>\n\n\n\n<li><strong>Household and business balance sheets are in good shape<\/strong>, which isn\u2019t often the case heading into a recession (2001 and 2007 are notable examples).<\/li>\n\n\n\n<li><strong>Global excesses are manageable <\/strong>\u2013while excesses (such as government debt) and imbalances do exist, they\u2019re not too severe, in our view.<\/li>\n\n\n\n<li><strong>AI investment stays robust <\/strong>\u2013 while there\u2019s a risk of AI-related spending moderating, most of the companies doing all this investment report that it\u2019s still not enough to keep up with demand.<\/li>\n<\/ul>\n\n\n\n<h2 id=\"h-what-could-cause-you-to-be-wrong\" class=\"wp-block-heading\"><strong>What could cause you to be wrong?<\/strong><\/h2>\n\n\n\n<p>Recessions are often driven by shocks, which are difficult to predict. To again use the U.S. as an example, five of the eight U.S. recessions since 1970 involved shocks (three oil shocks, a terrorist event, and a pandemic), which were hard to see coming.<\/p>\n\n\n\n<p>This cycle, a similar shock, or a new one \u2013 whether an escalation of trade wars, a military war (such as China invading Taiwan), or an entirely new crisis \u2013 could spark a recession.<\/p>\n\n\n\n<p>But shocks aren\u2019t the only recession catalysts. For example, if inflation were to re-accelerate, forcing central banks to raise interest rates anew, that would raise recession risks. And while private sector balance sheets are in good shape, government balance sheets are stretched, implying less room for additional fiscal policy to support economic growth.<\/p>\n\n\n\n<h2 id=\"h-finally-considering-this-outlook-how-are-you-positioned\" class=\"wp-block-heading\"><strong>Finally, considering this outlook, how are you positioned?<\/strong><\/h2>\n\n\n\n<p>Our view that the global economy continues to expand is consistent with corporate profits continuing to grow. In addition, the Federal Reserve and Bank of England are in rate cutting mode and we believe that AI is set to drive a significant productivity improvement. As such, our asset allocation guidance recommends a tactical overweight position to equities.<\/p>\n\n\n\n<p>However, we acknowledge that risks to the equity outlook are elevated, not least because valuation multiples are extended, particularly in the U.S. As such, we only recommend a moderate overweight position in equities. We\u2019ve partially hedged this equity exposure in our central investment construction guidance with:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>An overweight position in government bonds relative to riskier corporate bonds.<\/li>\n\n\n\n<li>A modest overweight position in gold, which could do well in recessionary environments that are associated with relatively strong inflation.<\/li>\n<\/ul>\n\n\n\n<p>This balanced approach positions our portfolios to capitalise on upside while guarding against downside surprises.<\/p>\n\n\n\n<p>Do you have questions about your investments? Don\u2019t hesitate to reach out to your wealth manager &#8211; we\u2019re always here to help.<\/p>\n\n\n\n<div class=\"wp-block-rbcwm-card rbc-card rbc-card-shadow\"><div class=\"rbc-card-wrap\"><div class=\"rbc-card-body\"><div>\n<h3 id=\"h-about-the-author\" class=\"wp-block-heading\">About the author<\/h3>\n\n\n\n<div class=\"wp-block-rbcwm-columns container\"><div class=\"row blockId-3998998e-490c-401b-aef4-823af6407248\">\n<div class=\"wp-block-rbcwm-column col-lg-4\">\n<figure class=\"wp-block-image size-full is-style-rounded\"><img loading=\"lazy\" decoding=\"async\" width=\"270\" height=\"270\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/wp-content\/uploads\/sites\/23\/2023\/07\/Paul-Danis_270x340-e1767951920104.jpg\" alt=\"Paul Danis Wealth Manager\" class=\"wp-image-3674\" srcset=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/wp-content\/uploads\/sites\/23\/2023\/07\/Paul-Danis_270x340-e1767951920104.jpg 270w, https:\/\/www.rbcwealthmanagement.com\/en-uk\/wp-content\/uploads\/sites\/23\/2023\/07\/Paul-Danis_270x340-e1767951920104.jpg?resize=150,150 150w\" sizes=\"auto, (max-width: 270px) 100vw, 270px\" \/><\/figure>\n<\/div>\n\n\n\n<div class=\"wp-block-rbcwm-column col-lg-8\">\n<h4 id=\"h-paul-danis\" class=\"wp-block-heading\"><a href=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/group\/our-people\/janet-mui\"><\/a><a href=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/our-people\/paul-danis\">Paul Danis<\/a><\/h4>\n\n\n\n<p class=\"is-style-subheader\">Head of Asset Allocation<\/p>\n\n\n\n<p>Paul is head of asset allocation research at RBC Brewin Dolphin. Paul began his career in 1998 trading interest rate futures and options in the pits of the Montreal Exchange. <\/p>\n\n\n\n<p><\/p>\n<\/div>\n<\/div><\/div>\n<\/div><\/div><\/div><\/div>\n\n\n\n<div style=\"height:100px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-rbcbd-short-cta-banner rbc-card-well row justify-content-center\"><div class=\"col-lg-12\"><div class=\"rbc-card text-center ani-up b-primary\"><div draggable=\"false\" class=\"rbc-card-wrap\"><div class=\"rbc-card-body false \"><div class=\"d-flex justify-content-center\"><div class=\"paragraph-mw\">\n<h3 class=\"wp-block-heading h3\" id=\"h-more-from-perspective\">More from Perspective<\/h3>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flow wp-block-buttons-is-layout-flow\">\n<a class=\"wp-block-button mx-half mt-1 is-style-primary-optional rbc-button rbc-button-primary-outline\" href=\"https:\/\/www.rbcwealthmanagement.com\/en-uk\/perspective\">View more content<\/a>\n<\/div>\n<\/div><\/div><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>The value of investments, and any income from them, can fall and you may get back less than you invested. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.rbcwealthmanagement.com\/en-uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Information is provided only as an example and is not a recommendation to pursue a particular strategy.<\/strong><strong><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Head of Asset Allocation, Paul Danis, responds to questions about recession risks in 2026 \u2013 and what investors need to know now.<\/p>\n","protected":false},"author":145,"featured_media":45719,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"","editor_notices":[],"rbc_url_alias":"","rbcbd_featured_desktop_image_position":"","rbcbd_featured_mobile_image_position":"center-right","footnotes":"","jetpack_post_was_ever_published":false},"categories":[790],"tags":[],"rbcwm_content_owner":[],"rbcwm_need":[769],"rbcwm_segment":[772],"rbcwm_solution":[759],"rbcwm_topic":[114,756],"rbcwm_channel":[99,782,781],"rbcwm_format":[779],"class_list":["post-45718","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-commentary","rbcwm_need-secure","rbcwm_segment-individuals","rbcwm_solution-investments","rbcwm_topic-investing","rbcwm_topic-market-analysis","rbcwm_channel-private-clients","rbcwm_channel-professional-partners","rbcwm_channel-uk-individual","rbcwm_format-article"],"acf":{"rbc_ct_service":"","rbc_ct_theme":false,"rbc_ct_topic":false,"rbcwm_subtitle":"Head of Asset Allocation, Paul Danis, responds to questions about recession risks in 2026 \u2013 and what investors need to know now.","rbcwm_post_author":"","rbcwm_custom_breadcrumb_text":"Perspective","rbcwm_custom_breadcrumb_link_url":"https:\/\/www.rbcwealthmanagement.com\/en-uk\/perspective","rbcwm_disclaimers":{"add_disclosures":"","perspective_disclaimer":"","expandable":"","omit_from_pages":"","disclaimer_footnote":""},"rbcwm_insight_cta_id":"","rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.5 (Yoast SEO v27.6) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>How likely is a recession in 2026? &#8211; RBC Wealth Management United Kingdom<\/title>\n<meta name=\"robots\" content=\"noindex, nofollow\" \/>\n<meta property=\"og:locale\" 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