LONDON, August 21 (Reuters) – The United Kingdom has emerged as the fastest-growing economy among G7 nations in the first half of 2025, with GDP expanding at an annualized rate of 2.2%, outpacing both the U.S. at 1.2% and the euro area at 1.4%. Concurrently, British equities have outperformed those on Wall Street this year. Despite these positive developments, domestic investors have largely stayed on the sidelines, favoring international markets while foreign capital flows into UK assets. n nData from the Investment Association reveals that over the past five years, UK retail investors have withdrawn more than £50 billion ($68 billion) from domestic equity funds, while allocating over £25 billion ($34 billion) to overseas equity funds. In contrast to American investors, who have shown renewed interest in their home market recently, British individuals have not increased their exposure to local stocks in the past three years. n nThis persistent lack of confidence among UK residents is not a recent trend. Consumer sentiment has remained below neutral for over four decades, with a notable decline following the 2009 post-financial crisis period. The current economic rebound appears to be occurring not due to domestic enthusiasm, but in spite of it. n nThe primary contributor to the UK’s strong GDP performance was a 20% annualized contraction in the trade deficit, driven by increased foreign demand for British goods and services. Household consumption rose modestly by 0.9%, and business investment grew by 1.7%, both underwhelming compared to external demand. n nFurther reinforcing the narrative of overlooked strength, UK corporate earnings have exceeded expectations significantly. During the second-quarter 2025 reporting season, FTSE 350 firms surpassed profit forecasts by an average of 16.5%, compared to an 8.3% beat in the S&P 500. While U.S. stocks dipped 0.9% on average in the week following earnings announcements—despite an expected 8% beat—UK shares gained 1.1%, indicating that market participants were positively surprised by company performance. n nAlthough inflation remained elevated at 3.8% in July—the highest among developed economies—this was largely influenced by temporary spikes in transportation costs. Domestic service sector demand shows some weakness, and potential tax increases in the autumn may dampen investment sentiment slightly. However, these headwinds are not expected to derail the broader recovery trajectory. n nGlobal investors and analysts appear increasingly confident in the UK’s economic trajectory. The disconnect lies within the domestic investor base, whose skepticism may be unwarranted given the accumulating evidence of resilience and growth. n— news from Reuters
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The UK is back in business. Someone forgot to tell British investors
LONDON, August 21 (Reuters) – Britain’s stock market is outperforming Wall Street in 2025, and the UK economy has enjoyed the fastest growth of any G7 country during the first half of the year. Yet British investors are mostly missing out while foreign buyers are reaping the benefits. n nSign up here. n nUnfortunately, this optimism about UK stocks doesn’t appear to be shared by UK investors. According to the Investment Association, a UK trade body, retail investors have sold more than £50 billion ($68 billion) in UK equity funds over the last five years while buying more than £25 billion ($34 billion) in international equity funds. And unlike American investors, the domestic crowd has not warmed to UK stocks in the last three years. n nBrits’ pessimism regarding their own country is by no means a new phenomenon, particularly if we use consumer sentiment as a gauge. While it has been negative on average for over 40 years, consumers have become much more pessimistic since the end of the financial crisis in 2009. n nPerhaps then it shouldn’t be surprising that the UK economy is doing well not because of the British but despite them. In the first half of 2025, the UK was the fastest-growing G7 country, recording a 2.2% annualised GDP expansion, compared to 1.2% for the U.S. and 1.4% for the euro zone. n nBut the UK’s surprisingly strong economic activity in the first six months of 2025 came despite lacklustre annualized household consumption growth of 0.9% and a so-so business investment expansion of 1.7%. The main driver of GDP strength was a 20% annualised drop in the UK’s trade deficit as foreigners bought more UK goods and services. n nWELCOME SURPRISE n nAnother group that seems to be oblivious to the recovery in the UK economy and stock market is UK analysts. During the Q2 2025 earnings season, FTSE 350 companies have beaten earnings expectations by 16.5% on average, while stocks in the S&P 500 beat expectations by 8.3%. n nGiven that roughly an 8% earnings beat is now expected in the U.S., share prices during the current earnings season have actually dropped by an average of 0.9% in the week after earnings releases. Meanwhile, in the UK, share prices have rallied by an average of 1.1% in the week after results, suggesting that investors have been pleasantly surprised by UK companies’ robust earnings. n nEXCESSIVE PESSIMISM n nWhinging is a national sport in the UK, but the degree of pessimism espoused by UK investors has arguably become excessive. And if I, a German, think that the British have become too pessimistic that means something. n nUltimately, the UK economy appears to be doing just fine, and most leading indicators point to a continued recovery of GDP growth in the second half of this year. n nTrue, inflation has proven sticky, coming in at 3.8% in July, the highest level among wealthy countries, but the jump last month was largely driven by volatile transportation costs. There is also some softness in domestic services demand, and uncertainty surrounding possible tax hikes in autumn is weighing on investment slightly, but these factors are unlikely to derail the longer-term economic recovery. n nInvestors and businesses around the world seem to realise that the UK’s outlook is persistently improving. Now, if somebody could please tell this to the British, I would be much obliged. n n(The views expressed here are those of Joachim Klement, an investment strategist at Panmure Liberum, the UK’s largest independent investment bank). n nWriting by Joachim Klement; Editing by Anna Szymanski and Sharon Singleton n nOur Standards: The Thomson Reuters Trust Principles., opens new tab n nOpinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.