A Rough Reception for UK GDP

UK gross domestic product (GDP) growth slowed a smidge to 1.7% annualised in Q2, but we see a lot for investors to like.^[i] Atop the plus column: It seems no commentator we follow thinks expansion is likely to last. We think this is great news for stocks, preserving a big brick in the UK’s proverbial wall of worry.

All GDP reports are backward-looking, since they measure what already happened, which doesn’t predict what will happen. So, in our view, nothing in Q2’s report tells you where stocks go from here. But the volume of yah, buts we observed greeting it throughout financial commentary we follow hints to us as to where sentiment is, setting the bar we think reality will likely need to clear to continue beating expectations. Judging from Thursday’s coverage, expectations are low. Here is a summary sample of what we saw: Yah, GDP grew 1.7% annualised, but it slowed from 2.5%.^[ii] Yah, falling government spending dragged it down, but solid consumer spending growth (1.1% annualised) won’t last after the household energy price cap finally jumped in July, and maybe it was all from the World Cup and start of Wimbledon anyway.^[iii] Yah, business investment accelerated to 6.8% annualised from 3.8%, but that is just projects pushed back by last year’s Budget uncertainty.^[iv] Yah, first-half growth was overall solid, but the Treasury is dialing down its full-year growth forecasts regardless, teeing up tax hikes to keep deficits in line with fiscal rules as new Prime Minister Andy Burnham tries to raise spending.

That strikes us as a pretty sad take overall, one our research finds isn’t necessarily rooted in reality. Take business investment. We agree, and think the data demonstrate, that uncertainty over how last November’s Budget would affect taxes caused businesses to wait and see before launching planned projects. We think this is the most logical explanation for business investment falling -11.4% annualised in Q4 2025, then bouncing 3.8% in Q1 2026 and another 6.8% in Q2.^[v] But we doubt businesses would launch those delayed investments and then sit idle. Generally speaking, according to our studies of economic history worldwide, when you get a demand pushback like that, you see continued growth at more traditional rates once the backlog clears. We find it is often the inverse of what we observe when something pulls demand forward: You get the initial surge in activity to take advantage of a temporary tax break or beat a scheduled tax hike, then the pothole, then normal-ish activity. Over time, we observe everything tends to even out, and we don’t see that anything in the UK changed fundamentally to quash the trend of uneven investment growth.^[vi]

If anything, we think things might be looking a little brighter on that front. The UK’s yield curve (a graphical representation of a single bond issuer’s interest rates, arrayed from short-term to long-term) is steep, with short-term rates well below long-term rates. In traditional fractional reserve banking systems like the UK, banks generally secure funding at short-term rates and base loan charges on long-term rates, which we think makes the gap between them a rough proxy for new loans’ profitability. A wider spread therefore renders more profitable lending, which we think is spurring white-hot business loan growth lately. In April 2024, business lending was crawling at 0.5% y/y, capping a three-year flattish stretch.^[vii] Then it climbed steadily, hitting 10.0% y/y in April and May 2026 before easing slightly to 9.2% y/y in June.^[viii] That is a lot of fuel for future expansion—new product lines, research and development, new facilities, all the good stuff that makes GDP hum. There are plans for data centres and other things related to artificial intelligence (AI). The new government is signalling a more pragmatic approach toward the North Sea’s oil industry in hopes of jumpstarting investment there.^[ix]

Additionally, much of Burnham’s economic plan involves delegating investment and infrastructure approval to local councils to cut red tape and speed things up, which we think augurs well for further growth—potentially amongst small businesses in particular—if executed well. Talk of tax hikes we have seen focusses on banks and individuals, not non-financial corporations. We imagine this is no fun for the potential targets, but we think a silver lining is that it helps keep business uncertainty relatively lower. Our research finds businesses don’t need a perfect landscape to invest. Just one where they can access capital and make a reasonable estimate of long-term return. That appears to us to exist now.

As for the consumer side of things, we don’t dismiss the pain of July’s energy price cap hike. Coming amidst a major summer heatwave, it makes air conditioning more expensive to run for those households blessed to have it. But it was higher in past years without inducing recession, and household pay has grown since then.^[x] Society has seemingly learned how to adjust and begrudgingly live with higher energy prices when they arrive. Note, too, that this is likely temporary, as July’s cap level is based on wholesale prices in the spring.^[xi] Today’s gas prices are below March’s highs, which may aid a downward reset in September, a modest relief.^[xii]

So whether or not UK GDP slows from here, we reckon it is probably beside the point. When headlines see an economy sure to fall in the foreseeable future, all it needs to do to beat expectations is not fall as hard as projected. The UK economy looks to us to be getting too much capital injected into it to fall hard. As it likely hums along, we think stocks will likely continue getting plenty of positive surprise.