A Rough Reception for UK GDP

UK GDP growth slowed a smidge to 1.7% annualized in Q2, but we see a lot for investors to like.^[i] Atop the “plus” column: It seems no one expects the party to last. This is great news for stocks, preserving a big brick in the UK’s wall of worry.

All GDP reports are backward-looking, so nothing in Q2’s report tells you where stocks go from here. But the volume of yah, buts that greeted it shows us where sentiment is, setting the bar reality will need to clear to continue beating expectations. Judging from Thursday’s coverage, expectations are low. Yah, GDP grew 1.7% annualized, but it slowed from 2.5%.^[ii] Yah, falling government spending dragged it down, but solid consumer spending growth (1.1% annualized) 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% annualized 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 dial up spending.

That strikes us as a pretty sad take overall, one not necessarily rooted in reality. Take business investment. We agree, and think it is clear from the data, that uncertainty over how last November’s Budget would affect taxes caused businesses to wait and see. That is the only logical explanation for investment falling -11.4% annualized in Q4 2025, then bouncing 3.8% in Q1 and another 6.8% in Q2.^[v] But it isn’t like businesses are going to launch those delayed investments and then sit idle. Generally speaking, when you get a demand pushback like that, you see continued growth at more traditional rates once the backlog clears. It is the inverse of when something pulls demand forward: You get the initial surge, then the pothole, then normal-ish activity. Everything evens out, and we don’t see that anything in the UK changed fundamentally to quash the trend of uneven investment growth.

If anything, things might be looking a little brighter on that front. The UK’s yield curve is wide, spurring white-hot business loan growth. In April 2024, business lending was crawling at 0.5% y/y, capping a three-year flattish stretch.^[vi] Then it climbed steadily, hitting 10.0% y/y in April and May 2026 before easing slightly to 9.2% y/y in June.^[vii] 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 centers and other things AI-related. The new government is pledging more pragmatism toward the North Sea’s oil industry in hopes of jumpstarting investment there.

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 augurs well for further growth—particularly among small businesses—if executed well. Talk of tax hikes centers on banks and individuals, not non-financial corporations. That is no fun for the potential targets but does keep business uncertainty relatively lower. 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 exist now.

As for the consumer side of things, we don’t dismiss the pain of July’s energy price cap hike. Coming amid 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. Society has 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. They are lower now, which should point to a downward reset in September, a modest relief.

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