The UK Economy Keeps Outshining Expectations

UK gross domestic product (GDP, a government-produced measure of output) for Q1 2025 came out Thursday, and we think it was a really good report. Even better, broad coverage we read seems to be misinterpreting it as a sugar high from Brits’ front-running US tariffs, not evidence that the UK economy is doing a-ok. Q1’s report may be backward-looking for stocks, but we think it suggests a bullish gap between sentiment and reality persists.

Headline GDP rose 2.9% annualised, the fastest since Q1 2023 and topping expectations.^[i] It did so as most commentators we follow warned businesses to would begin battening down the hatches ahead of April’s tax hikes, which were supposed to knock employment—incentivising consumers to tighten their belts just in case. Instead, household spending accelerated to 0.8% annualised from Q4 2024’s 0.5%, which stemmed entirely from tourism.^[ii] The detailed breakdown showing whether Q1’s growth came from domestic residents’ activity or overseas visitors isn’t available yet, so any definitive statements about consumer spending are premature. But January, February and March aren’t exactly prime tourist season in the UK. With abundant rain and no major events, they are generally a bit of a slog.

Meanwhile, business investment soared 25.6% annualised, rebounding from Q4’s -7.2% slide and then some.^[iii] Friends, this is not what you would logically project if businesses were broadly hunkering down ahead of rising costs and weakening demand. Our research finds contracting business investment tends to be the first big indication of trouble afoot, often falling earlier and deeper than consumer spending when recession (a broad, usually lasting decline in economic activity) materialises. We find it is frequently a swing factor. If businesses spent Q1 anticipating tax hikes would cause a recession or long period of sluggish growth, we suspect they wouldn’t have launched a flood of new investment in facilities and equipment that could take years to pay off. In our experience, companies just don’t do that when risk aversion is high. To us, this is a strong indication that whatever businesses told reporters and sentiment surveyors, their actions didn’t back it up—not a judgment, just an observation.

Perhaps the most encouraging thing is that most coverage we read ignored these points, focussing instead on trade. Exports jumped 14.8% annualised, which commentators we follow widely characterised as companies trying to beat US tariffs.^[iv] Fair enough. But imports jumped 8.7% annualised, which seems less about tariff frontrunning, given UK leaders gave no hint of retaliation plans and the fact the UK doesn’t import mountains of goods from the US.^[v] To us, that stat meshes more with improving domestic demand and businesses’ new investments.

If headlines want to focus on exports’ big contribution to GDP, well, fine with us. Our research finds markets move most on what people don’t talk about—that is where the surprise is. And in this case, we think an export-centric narrative raises the potential for that surprise to be positive. The general consensus is that if exports lifted Q1 GDP, Q2 will be weak even with the US and UK’s loose trade agreement reached last week. Not only did that non-binding accord leave the US’s 10% blanket tariff in place on most goods, but the front-running purportedly risks leaving a metaphorical pothole in Q2 exports. Hence, expectations for Q2 are pretty ho-hum.

What we think they miss: Most of the UK’s exports to the US are services, not goods, which are largely immune to tariffs.^[vi] And the UK responded to US tariffs not by raising its own barriers, but by removing tariffs on dozens of products—freeing trade in an already pretty free-trade nation. This makes it even more compelling for businesses to deploy new investments, which we think Q1 shows they are already of a mind to do. Hence, the stage seems set for domestic demand drivers to continue powering growth.

Even if it isn’t doesn’t match Q1’s robust rate, we think a nicely growing UK economy would beat grim projections from the Bank of England, Office for Budget Responsibility or others we have reviewed. Our research finds this is generally all stocks need—reality quietly besting expectations.