An Economic Check In on the UK

The UK’s monthly gross domestic product (GDP, a government-produced output measure) report for February landed this week, and whilst it is very old news for stocks by now, we think it shows the UK economy was on much firmer footing than commentators we follow deemed before the war in Iran began. With many headlines we read now warning the UK is amongst the countries most exposed to the war’s economic risks, we see continued high potential for economic reality to keep beating expectations.

Headline GDP rose 0.5% m/m in February, the fastest since January 2024.^[i] Services (0.5% m/m), heavy industry (0.5%) and construction (1.0%) all contributed, notching a recently rare trifecta.^[ii] This growth comes atop a small upward revision to January’s GDP growth, from flat to 0.1% m/m. Another noteworthy revision appeared in December’s industrial production, now estimated at a -0.4% m/m drop rather than -0.9%.^[iii] That figure, like January’s initially flat headline GDP, inspired a lot of dire warnings from economic analysts we follow. But now it turns out they were false readings, figments of the very incomplete dataset that informs the earliest estimates, as the Office for National Statistics’ releases explain.

Which logically means February’s stellar results are also subject to revision up or down. We don’t dismiss that. Yet neither does most coverage in the news outlets we review, and their opinion pieces and analyses of the situation strike us as dour, filled with caveats. We saw ample coverage reminding readers February was pre-war, warning higher fuel and energy costs risk an economic expansion described as fragile. Many articles we read dwelled on the IMF’s downgraded UK growth forecasts and called February the calm before the storm.

To us, this is what matters for stocks. Our research finds markets don’t move on absolute results. In our opinion, they don’t need gangbusters GDP growth … or even growth most observers would consider good. Rather, we think stocks generally weigh how reality squares up relative to consensus expectations. When expectations are as low as they appear to be now, results that are just ok, or even kind of bad, can therefore qualify as positive surprises and be bullish.

We think the UK showed as much last year. Monthly GDP rose just 7 times in 2025, falling four times and flatlining once.^[iv] For the entire year, GDP grew just 1.4%, a result most commentators we follow characterised as weak.^[v] That it was amongst the stronger G7 growth rates was more of an insult to the rest than a feather in Britain’s cap, according to most coverage. Yet UK stocks rose 25.8% last year, trouncing the MSCI World Index’s 12.8% return.^[vi] Weak GDP growth didn’t translate to weak stock market growth. Instead, we think it proved a relief to all those who presumed big tax hikes would choke activity.

We find this example instructive now, as many commentators we follow warn high energy costs are about to bite the UK economy hard. Headlines warn that not only will household costs go up, but the Bank of England will have to hike its benchmark interest rate to combat the supposedly resulting inflation, further hurting growth.^[vii]

We find it all a bit overwrought when you consider that oil and natural gas prices are already down from their late-March highs, making a lot of that chatter outdated.^[viii] Plus, within services, consumer-facing categories did most of the heavy lifting in February’s growth, implying households are in better financial shape than many commentators we follow allege.^[ix] We don’t dismiss higher fuel and electricity costs’ added burden, but spending on energy is still spending and adds to GDP. Perhaps may lead some households to make small budget cuts elsewhere, like switching to supermarket own-label products from name brands or making more meals at home, but that substitution is why we think higher energy prices, on their own, are unlikely to make inflation spike.  

Inflation is always and everywhere a monetary phenomenon, as Nobel prizewinning economist Milton Friedman taught. Whilst UK energy prices spiked in 2022 alongside global energy, and this coincided with hot inflation, our research finds A didn’t directly cause B.^[x] Instead, the Bank of England spiked money supply growth during COVID lockdowns, peaking at 15.2% y/y in February 2021.^[xi] We think this created the inflationary backdrop of too much money chasing too few goods and services, with 2022’s hot CPI readings resulting at a lag.^[xii] Today, broad UK money supply (M4) is growing at just 3.9% y/y, in line with prepandemic trends, which didn’t fuel runaway inflation.^[xiii] Which means … we see no rational reason for Bank of England rate hikes. We don’t dismiss the possibility of error, but we think it would be an odd thing to do, and factoring rate hikes into an economic outlook therefore seems too hasty to us.

So overall, we see a strong chance for the UK economy to keep beating dreary consensus expectations even if February doesn’t spark a string of fast monthly GDP readings. We think such sustained fast monthly growth isn’t necessary or even likely, considering how volatile this metric tends to be. UK GDP plodding along just a bit better than people think it will—as we find it has done for years now—should likely be enough for UK stocks to carry on.