Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson comments on October UK GDP data which was released today:
UK real monthly GDP rose just 0.1% in October relative to consensus expectations of 0.4%. The annualised rate was 4.6%, down from the September figure of 5.3%. The services sector printed a 0.4% monthly rise, whereas the year-on-year figure came in at 5.4%. Industrial production slowed even further, falling 0.6% for the month relative to consensus expectations of a 0.1% increase.
The headwinds facing the UK economy showed little sign of abating in October. Supply chain disruptions owing to the pandemic linger on and demand continues to outpace supply. As such, industrial production remains low while manufacturing continues to be constrained. However, forward looking manufacturing survey data indicates that sentiment remains positive. The manufacturing purchasing managers index, a survey of purchasing managers, printed 58 in the latest reading, indicating a continuing expansion. The new orders component accelerated from the previous month, another positive sign that manufacturing can rebound and catch up with demand when supply chain issues are resolved. The service sector also remained relatively strong, but is likely to exhibit some weakness as some restrictions are implemented to combat the spread of the Omicron COVID-19 variant.
The emergence of the new COVID-19 variant threatens the UK’s economic growth trajectory. New restrictions announced by Boris Johnson are likely to dampen demand slightly, but much less than imposing lockdowns and closures of retail and recreation. Some of the Bank of England policy makers have also spoken out about the difficulty in making policy decisions with little information available at the moment. One of the more hawkish members of the MPC Michael Saunders signalled the BoE could “press pause” on interest rate hikes until “we get some more clarity on Omicron”. The BoE was expected to announce an interest rate hike at their December meeting, however, this is now likely to be pushed back to February. Given inflation remains at a decade high of 4.2% and the labour market is relatively strong, it seems unlikely that interest rate hikes will be pushed out further.
Financial markets have been volatile as new information on the variant and responses from policy makers emerge. However, the economic impact looks as if it will be modest, and as long as this continues to be the case, growth will provide fundamental support to equities in 2022.