Is the long-awaited recession (a period of contracting economic output) finally here? Several economists say so after the Office for National Statistics (ONS) revealed the UK’s monthly gross domestic product (GDP, a government-produced measure of economic output) dropped either -0.5% or -0.6% m/m in July, depending on which data series one uses, with all three main components (heavy industry, construction and services) falling simultaneously for the first time in over a year.[i] This is possible, in our view, and with UK stocks still off February’s highs and enduring a weak August, we think it is hard to argue stocks are pricing in a robust economy.[ii] However, we think it is also hard to argue the latest GDP is out of sync with the recent choppy sideways trend, so we suggest not leaping to recessionary conclusions.
Exhibit 1 shows monthly GDP growth rates since 2022 began. We go back that far because, as you will see, there is a lot of bounciness, much of which the ONS reported was tied to skew from one-off events including the late Queen’s Platinum Jubilee, her passing, the World Cup, the King’s coronation and various industrial actions. We think that last bit is crucial because, according to the ONS, healthcare and education strikes were major factors in July’s services output dip.[iii] Moreover, though, the net result of all these choppy months was that quarterly UK GDP grew three straight quarters through Q2 2023 after a small decline tied to the late Queen’s funeral in Q3 2022.[iv] So if previous occasional declines similar to July’s didn’t correspond with a recession, we think it seems quite premature to say one is now for sure underway.
Exhibit 1: Choppy Monthly UK GDP Is the Norm
Source: FactSet, as of 13/9/2023. Growth rates are computed from the ONS’s index levels.
Then too, under the bonnet, the results weren’t uniformly negative. Focussing on services since it is the largest chunk of GDP, the largest detractor was the -3.4% m/m drop in human health activities, which was due to industrial actions by doctors and radiologists.[v] As the ONS reported, “65,557 appointments and procedures were cancelled because of the senior doctors strike and 101,977 acute inpatient and outpatient appointments were cancelled because of the industrial action by junior doctors.”[vi] This segment’s -0.17 percentage point (ppt) detraction was responsible for about one-third of services output’s drop.[vii] Education, also beset by strikes, lopped off another -0.07 ppt.[viii] So industrial actions were responsible for about half of services’ -0.5% m/m decline.[ix]
Which means there was still weakness elsewhere. Retail trade was one place, with activity (excluding autos and motorcycles) down -1.2% m/m—a result most commentators we follow blamed on the exceedingly rainy month.[x] But weather probably doesn’t explain the -2.1% m/m drop in information and communication (encompassing the UK’s tech industry).[xi] Positively, automobile and motorcycle sales and repairs grew, as did finance and scientific and technical services. Yet the biggest contributor was sports, amusement and recreation activities’ collective 12.4% m/m jump.[xii] Whilst it could be exaggerated by pandemic-driven seasonal adjustment issues, we think this looks like a whopping big sign of strong demand and discretionary spending. Even if you take the eye-popping number with a grain of salt, it doesn’t seem congruous with a deep recession forming, in our view.
So overall, we have a worse-than-expected headline result with some one-off negative skew as well as pockets of strength and weakness—which is basically what happened in March as well as December, September and June 2022.[xiii] Those four instances didn’t presage long declines.[xiv] Perhaps July’s weakness will be longer-lasting. But we don’t think that is assured, and the many bright spots within services argue against it. We aren’t seeing the uniform consumer belt-tightening that our research suggests usually comes with recession. So for now, we see a higher likelihood of positive surprise than negative, which we think is likely to aid UK stocks as uncertainty gradually lifts.
[i] Source: ONS, as of 13/9/2023. The headline figure in the ONS’s release as well as all press coverage is -0.5%. However, when downloading the data from the ONS to make a chart, we discovered calculating the growth rate from their index levels gives a result of -0.594%, leading us to suspect there is a rounding error.
[ii] Source: FactSet, as of 13/9/2023. Statement based on MSCI UK Investible Market Index return in GBP with gross dividends, 12/10/2022 – 31/8/2023.
[iii] “GDP Monthly Estimate, UK: July 2023,” Office for National Statistics, 13/9/2023.
[iv] Source: ONS, as of 13/9/2023. Quarterly UK GDP readings, Q4 2022 – Q2 2023.
[v] Source: World Bank, as of 13/9/2023. Statement based on services value added percent of UK GDP. “GDP Monthly Estimate, UK: July 2023,” Office for National Statistics, 13/9/2023
[vi] See note iii.
[vii] Source: ONS, as of 13/9/2023.
[xii] See Note ii.
[xiii] Source: ONS, as of 13/9/2023. Statement based on UK monthly GDP readings, June 2022 – July 2023.
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