The UK Economy Keeps Outshining Expectations

UK GDP for Q1 2025 came out today, and it was a really good report. Even better, broad coverage seems to be misinterpreting it as a side effect of US tariff front-running, not evidence that the UK economy is doing a-ok. Q1’s report may be backward-looking for stocks, but it suggests a bullish gap between sentiment and reality persists.

Headline GDP rose 2.9% annualized, the fastest since Q1 2023 and topping expectations.^[i] It did so as everyone expected businesses to begin battening down the hatches ahead of April’s tax hikes, which were supposed to knock employment—incentivizing consumers to tighten their belts just in case. Instead, household spending accelerated to 0.8% annualized 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% annualized, rebounding from Q4’s -7.2% slide and then some.^[iii] Friends, this is not what you expect to see if businesses are broadly hunkering down ahead of rising costs and weakening demand. Business investment tends to be the first big indication of trouble afoot, often falling earlier and deeper than consumer spending when recession materializes. It is frequently a swing factor. If businesses spent Q1 anticipating tax hikes would cause a recession or long period of sluggish growth, they wouldn’t have launched a flood of new investment in facilities and equipment that could take years to pay off. 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.

Perhaps the most encouraging thing is that most coverage ignored these points, focusing instead on trade. Exports jumped 14.8% annualized, widely characterized as companies trying to beat US tariffs.^[iv] Fair enough. But imports jumped 8.7% annualized, 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. Markets move most on what people don’t talk about—that is where the surprise is. And in this case, 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 non-deal deal. Not only did that non-deal deal leave the US’s 10% blanket tariff in place on most goods, but the front-running risks leaving a pothole in Q2 exports. Hence, expectations for Q2 are pretty ho-hum.

What they miss: Most of the UK’s exports to the US are services, not goods, which are largely immune to tariffs. 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 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, a nicely growing UK economy would beat grim projections from the Bank of England, Office for Budget Responsibility or others. That is generally all stocks need—reality quietly besting expectations.