UK exceptionalism… and why it won’t last

Please join me for our ‘Back to School’ webinar on Wednesday, 10 September, at 13:00 BST, as I examine prospects for the UK and global economies. Register for this 60-minute webinar at:

https://deloitte.zoom.us/webinar/register/WN_W4wF3S8kT9iscpGQbGo8ig

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’s 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 a 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.