An Economic Check In on the UK

The UK’s monthly GDP report for February landed overnight, and while it is very old news for stocks by now, it shows the UK economy was on much firmer footing than everyone feared before the war in Iran began. With headlines now blaring about the UK being among the most exposed to the war’s economic risks, we see continued high potential for economic reality there 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 results, 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 headline angst. But now it turns out they were false reads, figments of the very incomplete dataset that informs the earliest estimates.

Which of course means February’s stellar results are also subject to revision up or down. We don’t dismiss that. Yet neither do headlines, and their take on the situation is decidedly dour, filled with caveats. Coverage reminds us February was pre-war, warning higher fuel and energy costs risk a fragile expansion. Articles hype the IMF’s downgraded UK growth forecasts and call February the calm before the storm.

To us, this is what matters for stocks. Markets don’t move on absolute results. They don’t need gangbusters GDP growth … or even good growth. Rather, stocks generally weigh how reality squares up relative to expectations. When expectations are this low, results that are just ok, or even kind of bad, can qualify as positive surprise and be bullish.

The UK showed as much last year. Monthly GDP rose just 7 times in 2025, falling four times and flatlining once. For the entire year, GDP grew just 1.4%, a result most characterized as weak.^[iv] That it was among 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 35.1% in US dollars last year, trouncing the MSCI World Index’s 21.1% return.^[v] Weak GDP growth didn’t translate to weak stock market growth. Instead, it proved a relief to all those who feared big tax hikes would choke activity.

This example is instructive now, as everyone warns high energy costs are about to bite hard. Headlines warn that not only will household costs go up, but the Bank of England will have to hike rates to combat the resulting inflation, further hurting growth. It is all a bit silly when you consider that oil and natural gas prices are already down from their late-March highs, making a lot of that chatter outdated. Plus, within services, consumer-facing categories did most of the heavy lifting in February’s growth, implying households are in better financial shape than headlines allege. We don’t dismiss higher fuel and electricity costs’ added burden, but spending on energy is still spending and adds to GDP. It may lead some households to make small budget cuts elsewhere, like switching to supermarket private label products from name brands or making more coffee at home, but that substitution is why higher energy prices, on their own, are unlikely to make inflation spike.  

Inflation is always and everywhere a monetary phenomenon, as Milton Friedman preached. While UK energy prices spiked in 2022 alongside global energy, and this coincided with hot inflation, A didn’t directly cause B. Instead, the Bank of England spiked money supply growth during COVID lockdowns, peaking at 15.2% y/y in February 2021.^[vi] That created the inflationary backdrop of too much money chasing too few goods and services, with 2022’s hot CPI readings resulting at a lag. 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.^[vii] Which means … there is no rational reason for Bank of England rate hikes. We don’t dismiss the possibility of error, but it would be a silly thing to do, and factoring rate hikes into an economic outlook seems too hasty to us.

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