How does a fall in UK GDP impact the market?

Economy contracts as snow hits

Thursday 15 December, 2022

In summary

UK GDP shrinks over three-month period
Industrial action continues to cause disruption throughout December
We remain selective when investing in the UK and maintain a global and diversified approach to investing

There has been a mixture of good news and bad news in the UK recently, depending on the lens you look through. Good news – the economy grew in October. Bad news – this is only because the previous month was weak due to national mourning of our late Queen. Good news – a snow day in December, a lovely pre-Christmas surprise. Bad news – with energy prices already sky-high, this is forcing people to contend with the huge cost of turning on the heating. Then comes more bad news – countless strikes that will disrupt the festive period. Additionally, the Bank of England has increased interest rates this week in an attempt to curb inflation.

GDP – up or down?

This week, the headlines painted a rosy picture – ‘UK rebounds by more than expected in October’. This refers to the month-on-month GDP figure increasing 0.5% between September and October. Although, in September there was the extra bank holiday for the Queen’s funeral. Dig a little deeper and in actual fact UK GDP shrank over the three-month period, signposting the start of an expected prolonged recession.

CPI and interest rate decisions

In other important data this week, following the positive US inflation print on Tuesday, we have UK CPI and a 0.5% interest rate hike from the Monetary Policy Committee. The Bank of England’s main aim is to rein in the runaway inflation, but they do not want to send the economy into a deeper recession. A fine balancing act.

Snow falls, heating soars

December has brought about a wave of freezing temperatures. A layer of snow on Monday felt Christmassy and festive at its best, but at its worst caused major disruption across the UK. The major impact, however, will be the impact on households. Household bills, in particular energy, have been rising all year and a cold Winter is only going to compound intensifying pressure on the purse strings. Less disposable income will weigh on discretionary spending and thus slow the economy further.

Industrial action takes a hold of the country

Four weeks of rail strikes started yesterday, with a reduced service still running, but disruption planned at various points until the second week of January. Postal workers have been striking for a few weeks now and nurses’ strikes commence on Thursday. Teachers in England and Wales may follow suit of their counterparts in Scotland. University staff walked out on three days in November. Driving examiners are another to add to the string of walkouts planned over the next month. Baggage handlers at airports are also trying to secure pay increases that keep up with rising prices.

According to the Office for National Statistics, 417,000 working days were lost to strikes in October, the highest since November 2011 but is expected to rise significantly in December. For some perspective, nearly 12 million working days were lost in 1979 amid the ‘winter of discontent’. Industrial action of this breadth puts increased pressure on the UK government and Rishi Sunak, who, so far, has lasted 50 days in Number 10. A relatively unscathed period once put into context of his predecessor’s 45-day tenure. The very fact Mr Sunak has had to schedule two emergency Cobra meetings this week really highlights the gravity of the task in hand. Rising inflation has led the Unions to demand for wages to increase in real terms. If inflation continues to remain elevated throughout 2023, the unrest and disruption is likely to get worse.

Breakdown of strikes planned throughout December

Source: Bloomberg

UK exposure

The UK is facing a number of headwinds and looking solely at the economy, 2023 will be tough. There are numerous quality companies found on these shores. However, for the most part, their earnings are earned abroad. It remains imperative to invest into those companies with resilient earnings, experienced management teams and strong business models with the ability to pass on higher input costs, and it does highlight the importance of having a global and diversified approach to investing.

In Summary…

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