Despite a drumbeat of pessimism about the UK economy, a closer look reveals a landscape more nuanced—and perhaps more hopeful—than the headlines suggest. As the autumn of 2025 approaches, investors, policymakers, and everyday Britons are grappling with a complex mix of strong stock market performance, persistent inflation, cautious consumer sentiment, and looming fiscal challenges. The picture that emerges is one of resilience in the face of uncertainty, with both opportunities and obstacles shaping the nation’s economic trajectory.
On the surface, UK equities have been on a tear. As of September 19, 2025, the FTSE 100 index had posted an impressive gain of 11.6% for the year, trailing only slightly behind the S&P 500’s 13.6%, according to MoneyWeek. This marks a notable reversal from earlier in the year, when UK stocks outpaced their US counterparts. British investors, it seems, are taking notice: a recent survey by eToro found that 36% of 1,000 UK retail investors now view their home market as the most attractive globally for long-term returns, edging out the US at 35%.
DIY investors have been particularly active, with stocks such as Rolls Royce, Taylor Wimpey, Legal & General, and Lloyds Bank ranking among the top picks in August 2025. The appeal? Many see UK equities as undervalued, especially relative to historical norms and other major markets. "Today the UK equity market appears to be very undervalued relative to its long-run history and other equity markets," said Ian Lance, manager of Temple Bar Investment Trust, as reported by MoneyWeek.
Yet, this optimism in the stock market stands in contrast to a more sobering economic outlook. Inflation remains stubbornly above the Bank of England’s 2% target, coming in at 3.8% in August 2025. But there’s a silver lining: the Bank forecasts that inflation will peak in September before gradually declining to target over the next two years. Meanwhile, interest rates have been on a downward trend—falling by 125 basis points since July 2024, with the Bank of England holding steady at its September meeting. KPMG, in its latest UK Economic Outlook, even predicts another rate cut by the end of the year, followed by further reductions in 2026 that could bring the base rate down to 3.25%.
Economic growth, while modest, is not without its bright spots. The UK economy outpaced all other G7 nations in the first half of 2025, a fact that has surprised some observers given the challenges at home and abroad. Richard Knight, portfolio manager at Allianz GI Merchants Trust, pointed out that "GDP estimates for the year are rising," and highlighted the country’s ability to "digest and deal with higher interest rates." This resilience is echoed in consumer sentiment: the GfK consumer confidence index, though still negative at -19 in September, is notably higher than it was a year ago and a far cry from the record low of -49 seen three years prior.
Business activity is also showing signs of life. The UK services Purchasing Managers’ Index (PMI) hit a 10-month high in August, with the New Orders Index registering its largest one-month gain since March 2021. Tim Moore, economics director at S&P Global Market Intelligence, noted that this jump signals renewed momentum in the services sector—a key driver of the UK economy.
Still, the road ahead is anything but smooth. KPMG forecasts GDP growth of just 1.2% in 2025 and 1.1% in 2026, citing cautious consumer spending, weaker global trade, and ongoing uncertainty over trade policy as headwinds. The firm’s chief economist, Yael Selfin, summarized the dilemma facing Chancellor Rachel Reeves as a "tough balancing act." With mounting pressures in health, defence, welfare, and winter fuel payments—not to mention the cost of servicing higher public debt—the government is expected to favor tax rises over deep cuts to public services in the upcoming Autumn Budget. KPMG’s report goes further, projecting a "gradual ratcheting up of tax revenues over the next decade" as a necessary response to the UK’s financial demands.
The prospect of higher taxes is unlikely to sit well with everyone, but it reflects the reality of a government caught between the need to fund essential services and the imperative to maintain fiscal discipline. According to MoneyWeek, Chancellor Reeves faces particular scrutiny as she prepares the November budget, with expectations that she must "find a way to raise taxes and reduce spending, all whilst stimulating growth." The stakes are high, and the outcome will shape the UK’s economic landscape for years to come.
For investors, the distinction between the economy and the stock market is crucial. Even as economic growth slows, the UK stock market offers pockets of opportunity. Former chancellor Jeremy Hunt has identified technology and defence as sectors likely to attract continued interest, while Alan Dobbie, co-manager of the Rathbone Income Fund, notes the global reach of many UK companies: "75% of FTSE 100 revenues are derived from overseas, with that number falling to a still-hefty 50% for UK mid-cap stocks." This allows investors to tailor their exposure to either domestic or international trends.
Value hunters are especially drawn to sectors like financials, consumer discretionary, communications, and energy, which are currently seen as undervalued. Laura Foll, co-portfolio manager of Lowland Investment Company and Law Debenture Corporation, pointed out that "small and medium-sized companies have significantly lagged the FTSE 100 in recent years, often leaving what we view as sensibly managed, market leading businesses trading at substantial valuation discounts to history." In her view, this segment of the market presents some of the most compelling opportunities for those willing to look beyond the headlines.
But risks remain. The uncertainty surrounding the Autumn Budget, the trajectory of inflation, and the pace of global economic recovery all loom large. Business investment has been hampered by uncertainty over trade policy, and consumer spending remains cautious. The government’s ability to navigate these challenges—balancing fiscal responsibility with the need to support growth—will be tested in the months ahead.
In the end, the UK’s economic story in 2025 is one of contrasts: a robust stock market set against a backdrop of slow growth, persistent inflation, and looming fiscal pressures. For investors and policymakers alike, the challenge is to separate signal from noise, recognizing both the risks and the opportunities that lie ahead. As the Autumn Budget approaches and the Bank of England weighs its next move, the only certainty is that the coming months will be anything but dull for Britain’s economy.
