The UK economy surprised on the upside in October, as gross domestic product (GDP) grew 0.5% in the month, yet few are expecting this to be anything other than a false dawn.
September’s 0.6% contraction in GDP was largely attributed to the impact that Queen Elizabeth II’s funeral had on economic activity. The additional bank holiday, as well as the reduction in promotional events and advertising all contributed to the fall, and the Office for National Statistics recorded that the services sector fell by 0.8% during the month.
Conversely, that same sector was among the fastest growing in October, and the output in consumer-facing services grew by 1.2% in the month, after falls of 1.7% in September and 1.6% in August.
However, production remained largely flat in October, and GDP fell by 0.3% in the three months to October 2022, compared with the three months to July 2022. According to Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, the monthly rise in GDP is likely to have been more of a temporary upswing rather than the start of a more positive chapter for the economy.
Her concerns were shared by Ben Laidler, global markets strategist at eToro, who said that while the GDP rise was the largest seen in a year, beating expectations, much of the increase was technical.
Laidler was sure that the economy is now in recession and added that there was worse to come in the short term.
He continued: “Much of the October recovery was driven by comparison to a September that included an extra bank holiday, and this does not represent the start of a more positive trend. GDP growth over the past three months is down 0.3% and consumers are suffering a mounting cost of living crisis.
“The Bank of England is forecasting recession to last well into 2023, whilst an expected ninth straight interest rate hike, to 3.5%, this Thursday will only further underline this tough outlook, with inflation still above 10% and set to decline slowly.”
Marcus Brookes, chief investment officer at Quilter Investors, agreed that the picture for the UK economy was an unhealthy one, adding life would be “incredibly difficult” for many people this winter: “While inflation is expected to be at or around its peak now”, he said, “it is proving stubborn and is contributing to a prolonged cost of living crisis.
“With political factors continuing to play out, energy prices are not going to suddenly fall sharply, while we have also recently entered a fiscally restrained period from the government, with spending cuts accompanying large tax increases.”
However, he did see a silver lining for investors, for whom he said the path for interest rates is looking a lot clearer than it did just a few months ago. Brookes added that much of the negative news has already been digested by the markets:
“The journey may continue to be bumpy for investors in the short-term while inflation remains present, but now is exactly the wrong sort of time for investors to flee from the market and sit in cash. Looking for quality businesses that can not only survive the tough times but thrive as things begin to get a bit brighter into next year and beyond.”
Matthew Roche, associate investment director at Killik and Co, also thought the dangers had been “well-flagged” by markets. Roche said the FTSE 250, which is more domestically orientated than the FTSE 100, is down by 20% in 2022, arguing that, at least some degree, the bad news is already reflected in share prices.
He continued: “Therefore, if investors have funds set aside in cash for emergencies and planned major outlays, now should represent a good time to put spare monies to work. A further attraction is that investors can benefit from the higher levels of growth seen outside of the UK by investing in international businesses.”
Derrick Dunne, CEO of You Asset Management, agreed, advising investors to remain committed to their long-term plans, and avoid making “dramatic” changes that could impact their savings goals.
Though adversity can often bring opportunity for investors, any illusions that October’s GDP figure might herald a new dawn for the UK economy are likely to be exposed by the cold light of day this winter.