Editors’ Note: As always, MarketMinder Europe is politically agnostic. We favour no politician nor any party and assess developments for their potential economic and market impact only.
UK gross domestic product (GDP) grew more than economists expected in January, and we observed an interesting occurrence: Many economists we follow started rethinking all those UK recession forecasts.[i] Not long ago, the Bank of England (BoE) and a host of others projected the UK would enter recession late last year and contract through 2023 (a recession is a broad decline in economic activity).[ii] Now we know that in addition to eking out a flat Q4, UK GDP grew 0.3% m/m in January—beating analysts’ consensus expectations for 0.1% and starting the year on a strong note.[iii] Seems to us people are starting to catch on to what UK stocks appear to have been signalling for months.[iv]
It may be tempting to dismiss January’s growth as the product of a few one-off factors. The English Premier League, which took a lengthy break during the World Cup, was back in full swing—boosting all the activity that comes with match attendance and general revelry.[v] The transit strikes that hobbled several industries in December eased up a bit, and falling absenteeism boosted educational output.[vi] We saw some analysts note that without these one-off contributions, growth would have been flat. Fair enough, but UK monthly GDP has suffered skew from a host of one-offs since the late Queen’s death and funeral pushed some activity from September to October last year.[vii] Similarly, December’s drop stemmed partly from the aforementioned Premier League break and labour action.[viii] We think the main lesson here is not to get hung up on monthly GDP regardless of whether it is good or bad. Monthly data have too much short-term variability to glean a meaningful takeaway, in our experience.
As it does with most of its flagship data series, the Office for National Statistics (ONS) accounts for this by publishing rolling 3-month growth rates—a way of trying to even out the monthly wobbles. From this perspective, the results look a tad less encouraging. Rolling 3-month GDP growth turned negative in August and stayed in the red until flatlining in December and January.[ix] So whilst we appreciate the optimism from those outlets we follow who have erased their recession forecasts, we don’t think it is accurate to say the UK has for sure avoided one.
Yet we also don’t think recession is automatic, and if the UK does get one, it is seemingly shaping up to be much milder than most forecasts pencilled in initially, based on our observations. Not only is retail trade showing signs of life after inflation bit hard last year (up 0.5% m/m in January on an inflation-adjusted basis), but the services purchasing managers’ index (PMI)—which represents about 80% of UK output—showed continued growth in February.[x] Our research finds PMIs don’t always track GDP, but we think the data thus far are out of step with a snowballing economic decline. In our view, they seem more consistent with an economy muddling through despite numerous challenges. With loan growth still struggling, a rip-roaring expansion seems unrealistic.[xi] But given how low expectations have been based on the forecasts of financial and economic experts we follow, we doubt that matters.
As ever, we think stocks saw all of this first. The MSCI UK Investible Market Index (IMI) passed its 2022 peak several weeks ago, making Britain one of the first countries to reach new bull market highs.[xii] Whilst down a smidge since mid-February, its move since then is in line with global stocks, indicating to us that it is riding broader global trends and not pricing in renewed, outsized local weakness.[xiii] In our view, this illustrates a timeless point: When markets are saying one thing and headlines are saying another, we find trusting the market is usually the right move.
Inevitably, the conversation about UK GDP will soon turn political, as Chancellor of the Exchequer Jeremy Hunt is set to deliver the Spring Budget on Wednesday. Most briefing from 11 Downing Street has set investors’ expectations for more so-called austerity—the term popularly used to describe the government’s approach to public finances over the past 10 years—to rein in the deficit. But based on our research, a lot of that stemmed from prior economic forecasts that based lacklustre tax revenue projections on a rather grim 2023 economy. Now we have seen mounting talk—indeed apparent pressure—for the government to take advantage of faster-than-expected growth with tax cuts. Some commentators we follow are calling for Hunt to cancel the corporation tax hike that is scheduled to take effect in April, whilst others want the tax bands to rise with inflation after having been frozen last year, so as to undo the inflation-induced stealth tax hike. And we have also noticed mounting calls for the government to extend its subsidies for household energy bills so that costs don’t jump in April. It wouldn’t surprise us if all the suddenly rosy economic forecasts played into this—perhaps an effort to convince Hunt he has wiggle room to lighten the tax load.
We will keep an eye on that situation, as always, and cover meaningful developments as needed. But in the meantime, whilst tax cuts might help sentiment somewhat, we don’t think they are necessary to stimulate the economy or stave off recession. We think households have already shown a remarkable ability to tough it out even with the stealth hikes, and we find January’s data to be more evidence of that. On the business front, the higher corporation tax rates will still be lower than headline rates throughout the 20th and early 21st centuries.[xiv] If the UK could grow and invest in that environment, we think it can likely do so now.
[i] GDP (gross domestic product) is a government-produced measure of economic output. “Rishi Sunak Hails UK Economic Resilience After GDP Bounces Back,” Lucy White, Philip Aldrick and Elle Milligan, Bloomberg, 10/3/2023. Accessed via Yahoo! Finance.
[ii] “The Bank of England Predicts a Lengthy Recession at the End of the Year,” Staff, Associated Press, 5/8/2022. Accessed via NPR.org.
[iii] Source: FactSet, as of 10/3/2023.
[iv] Source: FactSet, as of 10/3/2023. Statement based on MSCI UK Investible Market Index (IMI) total returns in GBP, 12/10/2022 – 10/3/2023. The MSCI UK Investible Market Index includes all accessible shares in the UK market.
[v] Source: Office for National Statistics, as of 10/3/2023.
[x] Source: FactSet, S&P Global and Office for National Statistics, as of 13/3/2023. Statement based on January’s real retail sales monthly change, February S&P Global/CIPS UK Services PMI, and services sector as percentage of UK GDP. PMIs are monthly business surveys that track the breadth of economic activity—readings above 50 indicate expansion whilst readings below 50 imply contraction.
[xi] Source: Bank of England, as of 13/3/2023. Statement based on total credit growth, year-over-year change, January 2021 – January 2023.
[xii] Source: FactSet, as of 13/3/2023. MSCI UK IMI returns with net dividends in GBP, 8/4/2022 – 5/1/2023.
[xiii] Ibid. MSCI UK IMI total returns in GBP and MSCI World Index returns with net dividends in GBP, 16/2/2023 – 13/3/2023.
[xiv] Source: HMRC, as of 14/3/2023.
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