UK Reaction: GDP grows 7.5% in 2021 with Omicron denting December growth

Modupe Adegbembo, G7 Economist at AXA Investment Managers, comments on the UK GDP figures:

• UK GDP rose by 1.0% in Q4, a little above our expectations of 0.9%, but below consensus expectations of 1.1%.
• GDP in 2021 is estimated to have risen in the UK by 7.5% in 2021- the highest annual figure on record.
• As expected, December’s GDP figure fell impacted by Omicron, but by less than expected at -0.2% (consensus expectations -0.5%).
• We expect output to decline further in January as Omicron continued to weigh on output, before rebounding.
• Given upcoming challenges to real income and a faster monetary policy tightening we downgrade our growth forecasts. Pencilling growth of 4.3% (from 4.9%) and 2.1% (from 2.5%).

UK Q4 GDP recorded growth of 1.0% q/q, slightly above our expectations and below that of the market (0.9% and 1.1%, respectively). The expansion left the economy 0.4% below its comparable pre-coronavirus level (Q4 2019). December saw GDP fall by 0.2%, above market fears of a greater 0.5% fall in the midst of Omicron, Plan B restrictions and sharp falls in mobility. This leaves GDP equal to its pre-coronavirus level (February 2020). The release also included a material downwards revision of November’s figures to 0.7% (from 0.9%). We expect GDP to contract further in January, following sharp declines in activity, before rebounding robustly into February and March – we expect Q1 growth of 0.4%. 

As expected, services drove the decline in December but beat expectations of a faster decline falling 0.5% on the month (consensus -0.7%). The fall in services output was driven by falls in consumer-facing retail services which fell by 8.7%. The volatile construction sector continued to outperform expectations, up by 2% on the month whilst markets had expected a 0.7% decline. Manufacturing output posted a 0.2% expansion in line with expectations. 

Q4’s release shows GDP to have risen in the UK by 7.5% in 2021- the highest annual figure on records back to the second World War. This comes in just above our expectations and that of the market of a 7.2% and 7.0% rise, respectively. This year’s rebound comes after a 9.4% collapse in 2020 as the pandemic initially spread and lockdown was first imposed. 

Over the coming months, the challenges to real incomes are likely to dominate, NI increases and the utility price hike in April and general price increases are set to weigh on the consumer and provides a challenging outlook for growth. We expect that the draw down of savings accumulated over the pandemic will bolster consumption – though this is unevenly distributed across households. Given the real income squeeze the economy faces and the tighter monetary policy path we forecast (1% by end 2022 vs 0.75% prior), we downgrade our forecasts for UK growth in 2022 to 4.3% (from 4.9%) and 2.1% (from 2.5%) in 2023 . This compares to consensus forecasts of 4.5% and 2.2%. With GDP slipping only modestly in December, this vindicates the BoE’s decision to tighten monetary policy in February and leaves a March hike a possibility. However, on balance we expect the BoE to delay the next hike until May and expect rates to reach 1.00% in August where we expect them to stay – far short of market expectations.