UK Reaction: GDP surprise jump back above pre-pandemic level
Modupe Adegbembo, G7 Economist at AXA Investment Managers, comments on the UK GDP figures:
- UK GDP rose by 0.9% in November, firmly beating consensus expectations for a 0.4% rise.
- GDP is now above its pre-pandemic level (Feb 2020) by 0.7% on this measure for the first time.
- Despite this stronger performance, Omicron is likely to result in a drop in activity in December and January. We forecast 2021 GDP growth at 6.8%.
- Construction output beat expectations, up 3.5% on the month, with growth in industrial and services sectors also pushing output higher.
- We expect Omicron to weigh on future prints of GDP, with output contracting in December and January.
- February’s monetary policy meeting shaped by uncertainty, but we expect the BoE to keep rates at 0.25% at that meeting.
UK GDP rose by 0.9% on the month in November, stronger than the 0.4% consensus expectation. The strong rise was driven by a much bigger jump in construction output, although other sectors were also firmer than expected. The monthly index now sees activity 0.7% higher than the February 2020, pre-pandemic level. Despite the strong performance of GDP in November, we expect that the impact of Omicron will weigh on GDP for December and January. We now expect GDP for Q4 to come in at 0.6%, leaving GDP for 2021 at 6.8%. We expect Q1 GDP to be around 0.5%, with the economy picking up later in Q1 after expected contraction in January, leaving growth for 2022 at 4.9%.
Services, industrial and construction output all beat expectations this month. Services grew by 0.7% on the month, following a 0.4% increase in October and exceeding a more modest rise in mobility over the month. Industrial output grew by 1.0% compared to consensus of 0.2% following a surprise decline of 0.2% in October. Within this, manufacturing increased by 1.1% following flat growth in October. Manufacturing was supported by a 3.6% rise in car production as producers cited improved supply conditions. Construction output picked up markedly in November, increasing 3.5% on the month more than five times the pace forecast by consensus.
November’s strong GDP reading is just one piece of information the Monetary Policy Committee (MPC) will be reviewing ahead of their February rate decision. However, looking ahead we expect the economy to contract in December and January as the spread of the Omicron variant lead to falls in economic activity. We expect this impact to be material but to dissipate shortly thereafter.
Importantly, by the time the MPC meet on 3rd February, the MPC will not have comprehensive output data for these months. Given the uncertainty over activity – combined with the fact that the MPC has already taken a first step in raising interest rates – we expect the MPC to keep rates unchanged at 0.25% in February penciling in the next hike only in May, beginning the passive unwind of the Bank’s balance sheet with a further expected hike in November (to 0.75%). This is lower than current market expectations, and markets currently price a rate hike next month.