Investor confidence in the UK economy is rising, even as the country grapples with structural weaknesses and escalating EU-U.S. trade tensions. The Bank of England recently maintained interest rates, citing geopolitical uncertainty, yet analysts at Bank of America anticipate a 1.4% economic expansion in 2025, a notable improvement after years of sluggish growth.
Several factors contribute to this renewed optimism. The UK government is pushing for deregulation and increased capital investment, which could stimulate economic activity. Additionally, the potential for a favorable UK-EU trade deal in the coming year bolsters market confidence. Another critical factor is the UK’s strategic positioning with the U.S., as President Trump has indicated a willingness to exempt the UK from sweeping tariffs. Prime Minister Keir Starmer’s diplomatic visit to Washington further strengthened expectations of preferential trade treatment.
However, significant risks remain. While the UK has largely avoided the harshest U.S. trade measures, it has not been spared from tariffs on steel and aluminum. In 2024, UK exports of steel to the U.S. were valued at £370 million ($479.7 million), representing 9% of total steel exports, while aluminum exports reached approximately £225 million. A slowdown in global trade could also negatively impact the UK economy, reducing demand from key partners such as the EU and eroding business and consumer confidence.
Despite these challenges, the UK holds some advantages. Unlike the EU, the UK does not have a large trade surplus with the U.S., which may protect it from further tariffs. Additionally, the government has committed to increasing defense spending as a share of GDP, aligning itself with U.S. strategic interests. However, these factors have not shielded the UK from the effects of trade disputes entirely.
Larger macroeconomic concerns persist. While investor sentiment has improved, businesses continue to struggle with rising costs, partly due to last year’s budgetary measures, as well as workforce issues related to an aging and less healthy population. The UK stock market has performed well, benefiting from its defensive perception, favorable valuations, and strong performance in key sectors such as oil, gas, and finance. Nevertheless, this divergence from broader economic conditions could mean continued outperformance of large-cap stocks relative to domestic equities.
Ultimately, while investor optimism is on the rise, the UK’s economic trajectory remains uncertain, with external trade dynamics, fiscal constraints, and domestic economic challenges shaping its path forward.