In this paper, we study the effect of rotor-stator axial gap on midspan compressor loss using high-fidelity scale-resolving simulations. For this purpose, we mimic the multi-stage environment using a new numerical method that recycles wake unsteadiness from a single blade passage back into the inlet of the computational domain. As a result, a type of repeating-passage simulation is obtained such as observed by an embedded blade-row. We find that freestream turbulence levels rise significantly as the size of the rotor-stator axial gap is reduced. This is because of the effect of axial gap on turbulence production, which becomes amplified at smaller axial gaps and drives increases in dissipation and loss. This effect is found to raise loss by between 5.5% and 9.5% over the range of conditions tested here. This effect significantly outweighs the beneficial effects of wake recovery on loss.