The UK economy is having a brat summer

It’s the question being asked by bemused millennials up and down the land: “What exactly is a brat summer?”
More than just an album by popstar Charli XCX, “brat” is apparently a vibe — a positive, confident rallying cry of Gen Z. It has inspired dances, fashion and politicians, and has defined the summer. According to its creator, “brat” is, among other things, a girl who “has a breakdown, but kind of like parties through it … A little bit volatile”.
Volatility is an issue that financial markets have grappled with recently, and this definition made me think of the UK: is the economy having a “brat summer” of its own? Following what looked like a prolonged economic breakdown, the latest data suggests we might just be partying through it.
To my mind, there are four issues for investors in assessing whether the UK can extend its brat summer into next season. Or, more accurately, its B.R.A.T. summer.
First up is the B: borrowing. High debt levels have long been a challenge for the government. Borrowing was £3.1 billion last month, the highest July level since 2021, and national debt is well over 90 per cent of gross domestic product (GDP).
This highlights the funding challenges to Labour’s agenda. Servicing this debt while maintaining economic optimism is a tricky tightrope to walk. There is little doubt that the chancellor will be forced to raise taxes in the short to medium term to cover the cost of investment in public services, particularly in under-served areas of the country.
A big question ahead of the autumn budget will be whether Labour can truly be the growth government, or whether it will have to retrench on austerity.
Next is R: rebound — or not. The growth outlook seems a lot rosier than many had initially thought. GDP grew by 0.6 per cent between April and June, unemployment fell to 4.2 per cent, and the latest inflation number beat market expectations. In the second quarter, wage growth rose at the lowest annual rate in almost two years, smoothing the path to further interest rate cuts from the Bank of England.
Conversations I’m now having with investors centre on whether this is indicative of a short-term bounce or longer-term trend. Real-wage gains should boost spending power, although this will be at least partially offset by the impact of previous rate hikes on mortgage payments. While a rebound is probably overstating it, a full-blown recession is now rightly seen as unlikely.
Third is A, the attractiveness of the UK, which, compared to other European markets, looks increasingly interesting. It stands in contrast with, say, Germany, where investor sentiment has waned due to a weakening growth outlook, lacklustre manufacturing activity and a softening labour market.
UK stock market valuations look cheap relative to history, but also relative to Germany. Also, British companies have high dividends on offer, which somewhat offsets worries about the viability of a sustained recovery.
Our T is turbulence. Any reason for UK markets to get “a little bit volatile” will be driven by forces outside its borders. The UK is an open economy reliant on global trade and investment, and the FTSE 100 is dominated by global companies. At a time when the three largest economies — China, Europe and now, potentially, the US — are struggling, the UK is fighting against a jetstream of wider economic contraction.
Global central bank decisions will also affect the Bank of England’s interest rate trajectory, meaning potential surprises for the market, particularly if the US Federal Reserve settles on back-to-back cuts. And although not a major theme here, ongoing swings in US tech valuations will inevitably buffet the UK market as investors weigh up the outlook for the world’s largest sector.
Investors will, therefore, continue to monitor UK turbulence, but we expect it to be less bumpy than other markets.
I suspect my musings on economic data are in themselves very un-brat. If there is such a thing as bratenomics, it’s more likely to stand for Bitcoin, Reddit stocks, AI bubbles and Tech billionaires. But, as we head towards the end of summer, it seems to me that the party in the UK might just be getting started.
Seema Shah is chief global strategist at Principal Asset Management