UK GDP Tells a Well-Known Story

UK GDP just registered its fastest monthly growth rate since July 2020. Yet the island nation’s recovery still trails many major developed economies, according to the Organisation for Economic Co-operation and Development (OECD)—and the outfit also warned domestic developments (e.g., Brexit) may hurt future growth. While the latest GDP figures and projections will grab eyeballs, they are all old hat to markets—a point investors benefit from keeping in mind, in our view.

GDP rose 2.3% m/m in April thanks to the services sector’s 3.4% growth.^[i] COVID restrictions eased throughout the month, and the data confirm as much, as consumer-facing services (e.g., retail trade, travel and transport, and entertainment and recreation) jumped 12.7% m/m. Other people-facing services categories surged, including accommodations (68.6% m/m), food and beverages (39.0%) and other personal service activities, which include hairdressing (63.5%).^[ii] Education—the second-biggest contributor to growth behind wholesale and retail trade—rose 11.2% m/m and added 0.72 percentage point to GDP growth as more students returned to the classroom in person.^[iii]

Services is nearly 80% of UK GDP, so strong growth there was more than enough to offset contractions in the other two major sectors, production (which includes manufacturing as well as mining and oil drilling) and construction. They contracted -1.3% m/m and -2.0%, respectively.^[iv] Yet that weakness appears to be temporary, as mining’s -15.0% m/m decline stemmed from planned temporary maintenance closures at oil production sites.^[v] Services’ rebound is good news, in our view—but also ancient history to markets.

Many anticipate output to further improve in May given reopening progress. However, the broader summertime recovery may be a tad slower than initially projected, as Prime Minister Boris Johnson just delayed England’s full reopening from June 21 to July 19, and Scotland may soon do the same. Short-term speedbumps aren’t new for the UK, which has trailed other major developed economies after suffering the biggest decline from pre-pandemic levels among all G20 countries, according to a headline-grabbing OECD report highlighting the UK’s relative lag.^[vi] The latest news may also seem to validate a separate OECD missive, which warned COVID-related setbacks and trade frictions with the EU post-Brexit could lead to deep economic scarring.^[vii] These comparisons and forecasts are grabbing, but reality is more complicated, in our view.

According to the UK’s Office for National Statistics (ONS), several factors may explain why UK GDP fell harder than other countries’ during the pandemic.^[viii] For one, COVID restrictions, by their nature, disproportionately affect “social consumption” activities (e.g., recreation, restaurants and hotels)—industries that have a heavier weighting in UK GDP than other developed economies. The UK government’s COVID policies have also been relatively harsher and in place for longer than elsewhere. Beyond pandemic-related variables, though, countries’ GDP tabulation methods vary, from what they include to how they measure. The UK and Italy, for example, try to account for money spent in the more shadowy corners of the informal economy—activities other statistics agencies don’t formally track for GDP.^[ix] How the UK measures public services output—particularly for healthcare and education services—may have caused its lockdown-era GDP decline to look much worse than its peers. The ONS found that when excluding public services, economic contractions among G7 countries were more comparable, although the UK’s decline was still the largest.^[x] While these findings are interesting, they are also meaningless to forward-looking stocks, in our view.

However, one OECD concern that already appears off base: Brexit’s hurting UK trade. The latest data show this hasn’t happened yet. After dropping in January, EU exports and imports have regained a lot of ground—and non-EU exports and imports have fared even better. (Exhibits 1 – 2)

Exhibit 1: EU and Non-EU Exports of Goods

Source: ONS, as of 6/15/2021. Exports in goods at current market prices to EU and non-EU, monthly, April 2020 – April 2021.

Exhibit 2: EU and Non-EU Imports of Goods

Source: ONS, as of 6/15/2021. Imports in goods at current market prices from EU and non-EU, monthly, April 2020 – April 2021.

Though the EU remains the UK’s largest trading partner at a regional level—a status that isn’t likely to change any time soon—the UK isn’t shrinking away from the rest of the global economy. Its ties appear to be strengthening given its recent spate of free-trade agreements with non-EU countries.

As economic data continue to roll out, we expect pundits, politicians, policymakers and others to vigorously debate their meaning. For investors, though, we suggest thinking like markets. These numbers confirm a reality stocks have already priced in and moved on from, in our view. They are well aware of the herky-jerky reopening progress. Other countries have had reopening setbacks, and commentators have discussed the possibility of a pushed-back England reopening since April. Stocks also don’t ignore the UK and EU’s latest disagreement over their trade deal terms. If their deal were to fall through, stocks know businesses on both sides of the Channel already have no-deal Brexit plans that can be deployed if necessary.

In our view, markets are likely looking past the noise and beyond the summer months, to a time when the UK and other major developed economies have returned to a post-pandemic normal. We encourage investors to do the same, despite headlines’ preoccupation with the latest numbers.