Ho-Hum Q4 GDP Meets Bleak Sentiment

UK gross domestic product (GDP, a government-produced measure of economic output) grew 0.4% annualised (0.1% q/q) in Q4, and is that good?^[i] Bad? Middling? Some publications we follow expressed relief that growth beat economists’ consensus expectations for a slight decline, keeping a much warned-of recession at bay after a flat Q3.^[ii] Others cited declining per-capita GDP, household spending and business investment as signs of big underlying weakness.^[iii] And the forthcoming employer National Insurance Contribution (NIC) tax hike and slashed growth forecasts loomed over everything.^[iv] Counterintuitively, we think this is all good news for UK stocks. In our view, it hints at modest relief, helping markets climb a still-lofty wall of worry.

Look, we aren’t going to try to argue this was a wonderful report. But we think the weak points deserve proper context. Take the -0.1% annualised decline in household spending.^[v] Looks sad, but it locks in a 2024 trend of alternating growth and stalls.^[vi] After Q3 and Q4 2023’s sequential declines, household spending grew 3.1% annualised in Q1, 0.2% in Q2 and 2.4% in Q3.^[vii] Q2’s soft patch resulted from a -24.4% annualised drop in tourism spending.^[viii] Actual UK domestic household spending rose 2.1% annualised, in line with Q1 and Q3.^[ix] The first GDP release doesn’t include the tourism vs. domestic spending breakdown, so we can’t know yet if Q4 echoed Q2’s divide. But it wouldn’t surprise us at all, especially with seasonal adjustments likely still skewed by COVID lockdowns.

Similarly, business investment has swung sharply in both directions for years. (Exhibit 1) Q3 2023’s -9.0% annualised drop didn’t spark a deep recession.^[x] Nor did Q4 2022’s -10.3% annualised drop.^[xi] Rather, both preceded major rebounds.^[xii] It would be nice, we suppose, if investment were more stable. But our research finds the UK’s ever-changing business tax code pulls forward and pushes back investment decisions as companies try to anticipate and navigate changes. Not just to headline rates, but to deductions and credits. This is a long-running trend under governments headed by both main parties. With fiscal policy still under constant discussion, we doubt it changes. Similarly, court battles and fluctuating oil prices continue complicating North Sea oil investment decisions.^[xiii] This isn’t an ideal backdrop, in our view, but we don’t think ideal exists anywhere, and businesses have seemingly learned how to deal.

Exhibit 1: Business Investment’s Choppiness Isn’t New

Source: FactSet, as of 13/2/2025.

So yes, we think one can fairly point to the report and say only the government drove growth in Q4. Mathematically, based on the information available thus far, that is true. But the private sector isn’t in terrible shape. Its results are in line with 2024’s trend. Yes, that trend amounted to falling output once you adjust for population growth.^[xiv] But stocks don’t move on per-capita GDP, in our view. Or GDP, period. GDP is one measure of a country’s total expenditure and investment (or total output). It is tabulated by government statistics agencies, based on the information those agencies are able to collect. Plus, the Office for National Statistics (ONS) is battling low survey response rates as it struggles to come to grips with modern technology (like smart doorbells) and people’s changing communication preferences, so we think it is safe to say the data are low-quality these days.^[xv] Besides, if you have to dig into per-capita GDP to see contraction, we think that says something major about sentiment. In our view, working to colour decent data as weakness is the stuff positive surprise is made of.

Meanwhile, stocks, in our view, reflect what investors broadly view as likely to happen over the next 3 – 30 months on the economic and political front and how these developments affect corporate earnings. Hot expectations relative to the likely reality tends to set stocks up for disappointment. But these days, we find the UK has the opposite—exceedingly low expectations. We daresay today’s GDP report lowered them further.

Today, our reviews of financial news suggest people see a crawling economy about to be kneecapped by the employer NIC hike in April, seemingly ignoring that the last two times this tax rose it didn’t dent GDP. When employers’ NIC rose in 1999, UK GDP kept growing through the turn of the millennium even as the US endured a shallow recession in 2001.^[xvi] 2003’s employer NIC hike didn’t knock growth, either.^[xvii] We have read hundreds of articles about the pending rise since October’s Budget announced it, and we haven’t seen any mention these simple historical points. In our view, that reveals how skewed sentiment is.

So bring on those dour forecasts! In our view, they just reflect and reinforce dreary sentiment, further lowering the bar for positive surprise, which is already boosting stocks. UK stocks are up 6.7% year to date, beating global stocks’ 5.1%.^[xviii] US stocks, despite much faster-growing US GDP, are up just 4.1%.^[xix] The UK economy may not be as hot, but the wall of worry looks bigger to us than America’s. And for stocks, we think that is what matters most.