Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, comments on the latest UK GDP data:
UK real GDP rose 0.9% in the month of November, beating consensus expectations of a 0.4% increase and is up from a gain of 0.1% in October. GDP is now 0.7% above its February 2020 pre-pandemic peak.
Broken down by industry, services expanded 0.7% in the month, below production (1.0%) and construction (3.5%).
November UK GDP data does not reflect the government’s “Plan B” covid restrictions that began in early December, so we should expect some disruption to expenditure growth last month and in January. Labour supply was also particularly affected by the sheer scale of new (largely Omicron) covid cases. This forced many workers with a positive virus test to isolate.
However, given that the Omicron variant looks less deadly than previous strains, it looks like further government restrictions are unlikely in 2022, notwithstanding further mutations of the virus. Moreover, while working from home guidance will reduce mobility and social contact activities, these Plan B restrictions are soft in scale compared to the closing down of non-essential stores in 2020.
There are grounds to be optimistic about the UK economic outlook. First, new covid cases appear to be peaking and isolation rules have been relaxed since December. The rapid pace of Omicron moving through the population could also boost natural immunity and lower the risk of additional government restrictions. Second, consumers are confident to spend: the January IPSOS consumer confidence index has held up well at 51.9: it is down from the pre-pandemic level of 55.5 in March 2020, though has improved from a low of 40.7 in April in that year. Confidence is underpinned by a recovering labour market. Third, the financial wherewithal is there to sustain the services expansion and support pent-up demand. UK net household wealth in the third quarter stood at 3.5 times take-home pay, higher than the long-term average of 2.9 times. More wealth increases the ability for consumers (in aggregate) to raise expenditure from previous capital gains and/or raise borrowing.
On balance, we see the consumer recovery and the reduced risk of government restrictions creating an opportunity for domestically orientated UK stocks to outperform in the coming months.
A key risk to consumption is that the cost of living has increased, and this could encourage consumers to tighten their purse strings and raise precautionary savings. Nevertheless, the latest data shows our measure of real labour earnings (defined as the product of employment and weekly wages) grew by 1.5% from a year ago, indicating that real incomes are still expanding despite the acceleration seen in inflation.
