UK exceptionalism… and why it won’t last

UK exceptionalism… and why it won’t last

Which has been the fastest-growing country in the group of seven major industrialised economies (G7) this year?

• Surprisingly, it is the UK. Its economy grew by 1.1% in the first half of 2025, almost double the pace of the US, and outstripping all other G7 member countries. Germany, the poorest performer, saw no growth at all.

• In opposition, Keir Starmer said his aim was to make the UK the fastest-growing economy in the G7. In the first half of this year, Mr Starmer has done it. We don’t expect it to last.

• UK outperformance is partly a function of the sharp slowdown in US and Canadian growth caused by tariffs. The Canadian economy grew by just 0.1% in the first half of this year, little better than Germany. US growth was stronger, but way below the rates of the last three years.

• By contrast US tariffs may actually have supported UK activity. A surge in exports to the US and strong business and financial services exports gave a significant boost to first-quarter growth in the UK. Despite the announcement of major increases in US tariffs in early April – followed, swiftly, by a 90-day delay in their application to western economies – trade delivered a lesser, though still positive, uplift to UK activity in the second quarter.

• The end of the previous government’s stamp duty holiday in April provided another, one-off boost with a surge in housing transactions lifting consumer spending. More generally good wage growth ensured that consumer expenditure made a sizeable contribution to first half growth. Higher public expenditure, especially in health and defence, also bolstered growth.

• None of this looks like a recipe for sustained UK outperformance. This is partly because growth has been accompanied by a re-emergence of inflation, with the 12-month rate rising from 1.7% last September to 3.8% in July. Along with the mantle of fastest-growing economy, the UK has run the highest inflation rate in the G7 economy this year.

• Coupled with a weakening jobs market this bout of inflation is likely to blunt consumer spending and could even slow the pace of Bank of England rate cuts. The UK cannot count on trade to take up the slack. A 10% tariff on UK exports to the US, along with a softening of global demand, is likely to weigh on exports in coming quarters. 

• Ahead lies the budget, due in November or December. This is likely to be a consequential event. The National Institute of Economic and Social Research estimates that the government will miss its key fiscal targets by £41.2bn by the end of the Parliament. If this were to prove correct, the government would need to tighten fiscal policy in the budget, through tax increases or spending cuts, and on scale even greater than last October’s tax rises. 

• Stellar UK growth in the first half of this year overstates underlying strength of the economy. The boost from ‘one-offs’ like the ending of the stamp duty holiday will fade, while the drag from inflation, rising unemployment and US tariffs will increasingly weigh on activity. 

• This points to a return to much lower rates of growth in the second half of the year. We don’t expect activity to grind to a halt, as it did in the latter part of 2024. It looks more like a return to low growth, punctuated by occasional upswings, which have characterised the last three years.  True exceptionalism will have to wait.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.3% at 9,187, with marked declines in some UK stocks on concerns that the Autumn Budget could impose new bank levies. UK government long-term borrowing costs reached a four-month high. 

 Economics

• The US Court of Appeals ruled that many of US president Donald Trump’s recently imposed import tariffs are illegal
• The US government implemented import tariffs on goods valued less than $800, removing the previous de minimis exemption on small packages
• The US imposed its planned doubling of import tariffs on goods from India to 50%, escalating tensions between Washington and New Delhi
• Mr Trump threatened to impose tariffs and export controls on countries that “discriminate” against US tech companies
• US Federal Reserve governor Christopher Waller said that while he does not believe an interest rate cut greater than 0.25 percentage points is needed at the Fed’s next meeting in September, he may back a 0.5 percentage point cut if August’s employment data indicates a “substantially weakening economy”
• Mr Trump fired Fed governor Lisa Cook over allegations of breaching mortgage rules. Ms Cook filed a lawsuit challenging Mr Trump’s decision, saying that the president had “no authority” to fire her
• The US personal consumption expenditure price index, the Fed’s preferred inflation measure, remained steady at 2.6% in the year to July
• US consumer confidence deteriorated slightly in August, according to the Conference Board, due to rising worries about income and job availability
• UK unemployment is expected to reach 5% in the three months to August, up from the current rate of 4.7% and the highest rate since February 2021, according to the Resolution Foundation think tank
• UK long-term government borrowing costs reached a four-month high last week over growing concerns about the UK’s economic and fiscal outlook ahead of the government’s Autumn Budget
• UK retail investors increased their holdings of UK government debt at record rates this year, the FT reports, due to the higher yields on long-term government bonds in recent weeks
• UK vehicle production fell nearly 11% in the year to July, according to the Society of Motor Manufacturers and Traders, due to low commercial vehicle production compared with record figures in July last year
• The UK gas and electricity price cap will rise by 2% in October, costing approximately £35 a year for an average household, according to Ofgem
• The UK’s Office for National Statistics consistently underestimated the gender pay gap over the last two decades, according to the research published in the British Journal of Industrial Relations, the latest in a series of quality issues with the ONS’ economic statistics
• German business sentiment improved in August, according to the ifo Business Climate survey, driven by improved future expectations, however assessments of the current business climate deteriorated slightly. The ifo Institute commented that “the German economy’s recovery remains weak”
• French equities fell last week while government borrowing costs rose to their highest level since March in response to prime minister François Bayrou’s announcement of a confidence vote over his plans to cut the public deficit
• Chinese chipmakers are aiming to triple their production of chips used for AI applications by next year, the FT reports, amid increasing competition between the US and China to develop advanced AI models  

Business

• The Trump Media & Technology Group agreed a $6.4bn deal to acquire Crypto.com’s CRO token, the latest instance of Mr Trump’s increasing engagement with the cryptocurrency industry
• Japanese conglomerate Mitsubishi said the high cost of turbines is the reason for its withdrawal from three offshore wind projects in Japan, slowing the country’s plans to increase its renewable energy capacity
• Nuclear fusion developer Commonwealth Fusion Systems raised nearly $900m in its latest funding round, helping to finance the company’s ambitions to commercialise its nuclear fusion technology
• The share price of Japanese car manufacturer Nissan fell last week following the offloading of shares by its second-largest shareholder, Mercedes-Benz, putting pressure on the carmaker which is in the middle of a turnaround plan
• German car manufacturer Porsche dropped plans to produce its own electric vehicle batteries in response to weak global demand for EVs
• The UK National Wealth Fund has partnered with Australian pension fund Aware Super and global infrastructure investor Equitix to invest a combined £500m into a UK battery storage developer to boost investment into the sector and ease pressure on the national electricity grid
• Car manufacturer Lotus plans to cut 550 UK jobs amid falling sales and heightened global trading uncertainties
• The UK government issued contracts worth £537m for AI-related projects so far this year, more than the total for 2024, as part of government attempts to boost civil service efficiency 
• OrganOx, a medical-technology company originating from Oxford University, was sold to Japanese medical company Terumo for $1.5bn, making the deal the largest ever acquisition of a UK university spinout 
• The UK Financial Conduct Authority announced an investigation into energy company Drax over its sourcing of wood for biomass pellets used in its power stations  

Global and political developments

• Keir Starmer named former Bank of England deputy governor Baroness Minouche Shafik as his chief economic adviser
• The US is prepared to provide air defence and intelligence support as part of security guarantees for a postwar Ukraine, according to European officials, the FT reports
• The UK, France and Germany triggered a UN mechanism to reimpose sanctions against Iran for not resuming negotiations with the US over its nuclear programme
• Israel launched air strikes and moved personnel into Syria, according to Syrian state media, amid ongoing diplomatic efforts to ease hostilities, the FT reports
• During a meeting with South Korean president Lee Jae Myung in Washington, Mr Trump said he looks forward to meeting North Korean leader Kim Jong Un. Mr Lee said he would like Mr Trump to play a role “in establishing peace on the Korean peninsula”
• Denmark summoned the most senior US diplomat in the country over reports of “foreign actors” conducting influence operations in Greenland, following previous comments by Mr Trump that the US wants to take control of the island
• UK health experts warned of measles outbreaks when children return to school, following new data indicating a further decline in the measles, mumps and rubella (MMR) vaccination rate in London
• The UK Court of Appeal overturned a High Court injunction that stopped an Essex hotel from housing asylum seekers, following an appeal by the UK government   

And finally… in a shock footballing upset, UK Premier League team Manchester United lost a cup match against League Two side Grimsby Town, ranked 56 places below and representing the town famous for its maritime and fishing heritage – battered