UK Economy Finally Recovered to pre-Pandemic Levels, then Omicron Came

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The latest official GDP data for the UK economy showed consensus-beating expansion in November that took it back to where it was before the arrival of Covid-19, with all sectors putting in strong growth.

However economists say the arrival of Omicron will have dealt the economy a setback in December and January, although they say the prospect for a strong February rebound looks likely.

UK GDP rose 0.9% in November said the ONS, beating expectations for 0.4% and eclipsing October's reading of 0.2% (which itself was revised up from 0.1% previously).

"The data confirms that activity levels have now risen back above pre-pandemic levels," says Simon Harvey, Head of FX Analysis at Monex Europe.

"To get back to pre-recession levels inside 2 years is a policy success. We estimate this should limit labour and capital scarring to just 1%," says Simon French, Chief Economist at Panmure Gordon.

But for the UK economy to remain above pre-pandemic levels Harvey says December’s GDP estimate mustn't show a fall of more than -0.2%.

The Index of Services - which gives a view of how the economy's largest sector performed - registered growth of 0.7%, up on October's 0.4%.

Industrial Production increased 1% in November, surpassing estimates for 0.2% and October's -0.6%.

Manufacturing Production rose 1.1% in November, exceeding expectations for 0.2% and October's 0.1% growth.

Construction Output increased 3.5% in November, beating the market consensus of 0.6% and October's -1.8%.

Even the trade balance beat expectations with a deficit of -£11.34BN being recorded, which is smaller than the -£14.20BN expected and more or less unchanged on October's -£11.81BN.

"While we expect services activity to slow heading into December, not only due to reduced demand for high-contact activities but also a fading out of retail sales as seasonal shopping was brought forward to November to avoid supply disruptions ahead of Christmas, the more robust economic momentum heading into the Omicron phase in December and January is undoubtedly a positive for financial markets," says Harvey.

Capital Economics estimate the economy declined 0.5% month-on-month in both December and January.

Above: "Services were the main contributor to GDP’s 0.9% growth in November 2021, but all sectors saw positive monthly growth" - ONS.

November’s better-than-expected result means that GDP may have risen by 1.1% quarter-on-quarter in the fourth quarter as a whole says Capital Economics, up from their previous estimate of 0.7%.

They think GDP in the first quarter may have been flat, compared to their previous forecast for a 0.2% quarter-on-quarter fall.

"The recent signs that the Omicron wave is starting to subside suggests that GDP will probably rebound in February and March. But growth will then be restrained by the hit from higher taxes and utility prices from 1st April. We suspect GDP this year will be weaker than the consensus forecast," says Paul Dales, Chief UK Economist at Capital Economics.

Pantheon Macroeconomics forecast a 0.6% month-on-month in December, with a further 0.3% fall coming in January.

"Nonetheless, Omicron looks set to fade almost as quickly as it arrived, thanks partly to the rapid rollout of booster jabs. As a result, we expect the government to allow “Plan B” rules to automatically expire on January 26, and for GDP to bounce back in February," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.