Surprise! UK November GDP Grew

The UK is in recession. We have seen that declarative statement a lot since UK GDP contracted in Q3, as pundits paired the dip with the Bank of England’s (and others’) forecast for the UK to enter recession in 2022 and stay there for most of 2023. After all, if output dropped in Q3, surely it would get even worse in Q4 as the household energy price cap reset higher—to say nothing of the cost of living crisis continuing to weigh in 2023. But the data threw a small spanner in the works Friday: The Office for National Statistics (ONS) revealed GDP grew 0.1% m/m in November, adding to October’s revised 0.5% rise.^[i] Now some cheer has returned, with a lot of the coverage taking a whaddaya know, maybe we avoided a recession in 2022 after all! approach. Maybe so! But also, for stocks, we doubt it matters.

In our view, it all comes down to how markets work. Stocks look forward, discounting the probability that reality beats expectations over the next 3 – 30 months. So markets are most likely looking to this spring, summer and beyond, not dwelling on what may or may not have happened last October, November and December. Therefore, in our view, these data matter less than how they affected expectations for 2023 and beyond.

After taking a tour of the coverage, it became pretty clear that the newfound optimism is a) tenuous and b) backward-looking. For one, pundits couldn’t resist finding clouds in the silver lining. Some dwelled on the fact heavy industry slipped -0.2% m/m, driven by manufacturing output’s -0.5% slide—with only services’ 0.2% rise driving GDP higher.^[ii] Rather than call that a good sign that the sector representing about 80% of UK output is in better-than-expected shape, coverage added the caveat that it seemed driven primarily by pubs and restaurants’ enjoying a bump from the World Cup starting November 20. That is unlikely to repeat in December, given November contained more matches and England exited in the quarter-final (sorry), keeping broad enthusiasm tempered. Others dwelled on the fact that rolling 3-month GDP remained negative at -0.3%, warning the trend is still bad even if temporary factors lifted growth at year-end.^[iii] So we think it is fair to say expectations are still quite dim.

Heck, even the interpretations of November’s rise seem unnecessarily grim. Yes, the World Cup was a boost, but as the ONS’s release noted, there was some offset from the fact that professional soccer was on hiatus during the tournament, losing all the consumer activity that accompanies weekly Premier League matches. As for that negative 3-month print, the period includes September, when the late Queen’s death and funeral created extra bank holidays, dragging output down in that month. Like the World Cup boost, this isn’t the sort of thing one would logically extrapolate forward.

So as we enter 2023, negative sentiment toward the UK economy still seems intact. People remain focused on living costs—understandably—and projections for 2023 remain dreary. Real disposable incomes are down, as wage growth hasn’t kept pace with inflation and frozen tax bands have taken a large bite out of the raises that people did receive. Then there is the matter of the household energy price cap. People have gotten used to it being a series of giant stair steps higher and seem to be penciling in perpetual increases that will hurt discretionary spending. So, according to some, will higher monthly payments on mortgages that are out of their fixed-rate windows. And on the business side of things, the government’s plans to reduce help with business energy costs are fueling yet more pessimism.

Against that backdrop, it shouldn’t take much to deliver positive surprise this year. For one, as we showed earlier this week, energy costs are actually down quite a bit, and we see a strong chance the household price cap will actually reset lower in the spring, not higher. That won’t be an immediate salve, as the cap now resets quarterly and increased this month. But time could be a friend on this front. Lower energy prices should also help businesses struggling under the weight of higher overhead costs. Easing this headwind alone creates a high likelihood that any recession is rather mild. That would be a positive surprise. So would the UK economy slipping choppily sideways for a bit. Or eking out some net growth. Those seem well within the realm of possibility. Note, too, that UK loan growth—while weak—remains positive, adding fuel to the economy. If a severe recession were nigh, we would expect to see credit supply and demand shrivel. To date, they aren’t.

Now, this doesn’t mean UK stocks will repeat 2022’s dramatic outperformance. That stemmed primarily from the UK market’s heavy weightings to Energy and Materials, which benefited from spiking commodity prices earlier in the year. The weak pound was an added help on this front, as energy and commodities are generally priced in dollars, giving UK firms’ revenues a nice bump after conversion. Now the pound is strengthening and commodity prices are back down to pre-Ukraine invasion levels, taking 2022’s big tailwinds off the table. But other sectors got hit harder—especially more economically sensitive areas—making the UK quite likely to participate in global stocks’ recovery from last year’s bear market, whenever that recovery begins (if it hasn’t already).