Ho-Hum UK Q4 GDP Meets Bleak Sentiment

UK GDP grew 0.4% annualized (0.1% q/q) in Q4, and is that good?^[i] Bad? Middling? Some outlets expressed relief that growth beat expectations for a slight decline, keeping the widely feared recession at bay after a flat Q3. Others cited declining per-capita GDP, household spending and business investment as signs of big underlying weakness. And the forthcoming payroll tax hike and slashed growth forecasts loomed over everything. This will probably sound loony, but we think this is all good news for UK stocks. 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 the weak points deserve proper context. Take the -0.1% annualized decline in household spending.^[ii] Looks sad, but it locks in a 2024 trend of alternating growth and stalls. After Q3 and Q4 2023’s sequential declines, household spending grew 3.1% annualized in Q1, 0.2% annualized in Q2 and 2.4% annualized in Q3.^[iii] Q2’s soft patch resulted from a -24.4% annualized drop in tourism spending.^[iv] Actual UK domestic household spending rose 2.1% annualized, in line with Q1 and Q3.^[v] 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 at all, especially with seasonal adjustments still skewed by COVID lockdowns.

Similarly, business investment has swung sharply in both directions for years. (Exhibit 1) Q3 2023’s -9.0% annualized drop didn’t spark a deep recession.^[vi] Nor did Q4 2022’s -10.3% annualized drop.^[vii] Rather, both preceded major rebounds. It would be nice, we suppose, if investment were more stable. But the UK’s business tax code is ever-changing, which 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. We doubt this is a backdrop anyone would consider ideal, but ideal doesn’t exist anywhere, and businesses have learned how to deal.

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

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

So yes, 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 it isn’t like the private sector is swirling the drain. Its results are in line with 2024’s trend. Yes, that trend amounted to falling output once you adjust for population growth. But stocks don’t move on per-capita GDP. 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. In the UK, the data are very well known to be low-quality these days, as the Office for National Statistics 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. Besides, if you have to dig into per-capita GDP to see contraction, we think that says something major about sentiment. Working to color something blasé in dark tones is the stuff positive surprise is made of.

Stocks, meanwhile, 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 sets stocks up for disappointment. But these days, the UK has the opposite—exceedingly low expectations. We daresay today’s GDP report lowered them further.

Today, people see a crawling economy about to be kneecapped by a payroll tax hike in April, seemingly ignoring that the last two times this tax rose it didn’t dent GDP. When payroll taxes rose in 1999, UK GDP kept growing through the turn of the millennium even as the US endured a shallow recession in 2001. 2003’s payroll tax hike didn’t knock growth, either. We have read hundreds of articles about the pending tax hike since October’s Budget announced it, and we haven’t seen any mention these simple historical points. That tells you how far out of whack sentiment is.

So bring on those dour forecasts! They just reflect and reinforce dreary sentiment, further lowering the bar for positive surprise, which is already boosting stocks. UK stocks are up 6.3% year to date, beating global stocks’ 3.9%.^[viii] US stocks, despite much faster-growing US GDP, are up just 3.0%.^[ix] The UK economy may not be as hot, but the wall of worry there is bigger than America’s. And for stocks, that is what matters most.