UK Set to Avoid Recession in 2022 GDP Data for December

• UK looks set to have avoided recession in 2022
• As November sees GDP grow 0.1%
• Challenges perma-bear consensus towards UK
• On balance, supportive of GBP outlook

Image © Adobe Images

The British Pound rose against the Euro and Dollar on Friday as investors digested the first major UK data release of 2023 that showed the UK economy unexpectedly grew in November.

Tne ONS said the economy grew 0.1% in November thanks to a 0.2% expansion in the country's services sector, meaning the prospect of the UK falling into recession in the final quarter of 2022 is unlikely.

The better-than-expected figure defied the market consensus expectation for a contraction of 0.3%.

"UK monthly GDP was up 0.1% MoM in November as the economy continues to show resiliency in the face of high inflation. Notably, NHS Test and Trace and COVID-19 vaccination programme activity fell by 63% in November, knocking 0.2pp off monthly GDP - so underlying growth is firmer," says a note from Saltmarsh Economics in response to the figures.

Growth in the year to November nevertheless stands at an uninspired 0.2%, however, the widespread perma-gloom towards the UK economy will nevertheless be challenged by the official data and incoming signs that the economy saw a robust performance in December despite ongoing inflationary pressures.

"Remember the cosy consensus is that the UK will experience the worst recession of any major economy," says Julian Jessop, Independent economist and an Economics Fellow at the IEA.

Currencies tend to find support when domestic data comes better than expected, therefore on balance, Friday's GDP data is technically supportive for the Pound.

"We have seen retailers report stronger than expected earnings reports for Q4 over the past week, and it appears a stronger than expected consumer services and services more broadly have helped the UK economy defy gloomy expectations," says Jonathan Moyes, Head of Investment Research, Wealth Club. "Many will be taken by surprise by today’s announcement."

The Pound to Euro exchange rate recovered from earlier lows to go to 1.1270, albeit the near-term trend remains to the downside owing to a boost in sentiment towards the Eurozone's single currency thanks to falling gas prices.

The Dollar is under pressure following Thursday's softer-than-expected U.S. inflation data and the UK data allows the Pound to Dollar exchange rate to push higher to 1.2240.

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, says GDP would rise by 0.1% on a quarter-on-quarter basis in the fourth quarter if it was simply unchanged from November's level in December.

"Put differently, GDP would have to fall by at least 0.4% month-to-month in December, for it to drop by 0.1% quarter-on-quarter in Q4," he says.

But based on the better-than-expected earnings results from the likes of Tesco, Sainsbury's and M&S, this looks unlikely.

UK data has been largely absent from the currency calendar in 2023 until today as the ONS also reveals the country's manufacturing and industrial sectors remain under pressure.

Industrial Production declined by 0.2% in the month to November, but this was better than the -0.3% the market was expecting. Manufacturing contracted a more severe 0.5% in the month to November, worse than the -0.2% the market was expecting.

Elsewhere, the index of services contracted 0.1% in November, which was less severe than the -0.3% the market was looking for.

The outlook for the UK remains difficult, but the outright negativity that seems to have dominated consensus thinking of late is being challenged.

"It may be too soon to mark the beginning of a turn in sentiment for the UK, but a quiet consensus appears to be forming. Energy prices are falling sharply, China is reopening and interest rate expectations have eased significantly," says Moyes.