GDP recovers to pre-pandemic peak, but rate hikes, higher energy costs and tax increases all raise the risk of a recession in 2022, says Azad Zangana, Senior European Economist and Strategist at Schroders.
Monthly real GDP growth rose from an upwardly revised rate of 0.2% in October to a strong 0.9% in November, beating consensus expectations of 0.4%. The latest release is also significant as it shows that the level of UK output has now surpassed the previous pre-pandemic peak.
On a rolling three-month on three-month basis, growth accelerated from 0.8% to 1.1%, which bodes well for the final quarter of the year. On a year-on-year basis, this equates to 8% growth.
Within the details of the release, services activity recorded another strong month with 0.7% growth, helped by a better than usual Black Friday. Transport and storage services activity jumped 3.8% in the month, thanks to strong retail sales (up 1.4%), which also helped lift wholesale and retail activity.
Industrial output rose 1%, largely driven by the manufacturing sector which grew by 1.1% during November. Meanwhile, construction activity grew by 3.5%, more than reversing the 1.7% contraction the previous month.
Overall, the latest GDP figures suggest that the economy was performing well towards the end of the year. Of course, some restrictions including work from home orders were reintroduced in response to rising cases and concerns over the Omicron variant of Covid.
This may cause output to dip in December, especially for entertainment services. However, anecdotal evidence from retailers suggest that is has been a strong season for sales, which should support momentum heading into the new year. This should also provide enough evidence for the Bank of England to raise interest rates again in February.
However, near-term strong growth may falter by the spring as many homes will see their energy bills rise by just over 50%, along with increases in national insurance (NI) contributions (payroll tax).
Pressure is mounting on the government to cut VAT on home energy, and to provide additional support, including potentially delaying the increase in NI. Inflation is forecast to peak close to 7% in April, squeezing households’ finances severely.
Excess savings built up during the pandemic can act as a safety cushion, but if consumer confidence slips, so will spending. Though not in our baseline forecast, there is a significant risk of a short recession during the summer.