February GDP: Not Great, but Still No Recession

Another month in the books, and the UK recession (a period of contracting economic output) many economists have projected still hasn’t materialised: February monthly gross domestic product (GDP) was flat, levelling off after January’s upwardly revised 0.4% m/m rise.^[i] Under the bonnet, the results were even more encouraging, in our view. We doubt it is a surprise for stocks, given the UK has materially outperformed global markets over the past half year, but we think it is worth a quick look to see what markets may have been factoring into prices.^[ii]

At first blush, February might look like a bit of a setback considering growth in construction offset small declines in heavy industry and services.^[iii] The latter fell -0.1% m/m, inching back after January’s 0.7% jump.^[iv] But the decline doesn’t appear to have come from weakening demand. The largest detractor was education, down -1.7%, largely because of teacher strikes.^[v] Industrial action also hampered public administration and transit services.^[vi] We say this without judgment, mind you—just pointing out the facts as reported also by the Office for National Statistics.

In the services categories our research finds to be more sensitive to customer demand, the results were strong, in our view. Wholesale and retail trade rose 0.1% m/m, adding to January’s 0.6% rise.^[vii] This echoes strength in retail sales reports, which showed sales volumes rising recently.^[viii] Some commentators we follow dismissed this as a figment of retailers’ discounting merchandise, but we recall the same crowd warning of trouble when sales volumes slipped amid higher prices last year. In our view, you can’t have it both ways. If consumers are regaining buying power, we find that is generally a good thing. Accommodation and food services output rose 0.3% m/m, suggesting people are starting to go out more—another thing inflation appeared to curb last year.^[ix] We think the 1.6% m/m rise in arts, entertainment and recreation output echoes this, especially as that category has now moved past the skew from when the World Cup paused Premier League football last year.^[x] Meanwhile, real estate services output was flat, suggesting some stabilisation after spiking mortgage rates slammed the industry late last year.^[xi]

So, we think there are lots of silver linings here. But also, a caveat: In our view, these data are all backward-looking, and many consumers have to reckon with increased living cost pressures from April on thanks to another stealth tax increase.^[xii] Mercifully, energy costs aren’t soaring on top of that, and several researchers estimate the household energy price cap will likely fall later this year.^[xiii] Household living costs aren’t soaring like they were this time last year.^[xiv] But wage growth has taken time to catch up, and taxes are taking a larger bite, so we may yet still see a bit of belt-tightening.^[xv]

Crucially, however, we think stocks are well aware of this. The household tax burden has been a hot topic amongst commentators we follow for a couple years now, as has lagging wage growth. The strikes are also factored into expectations, in our view, based on the wide volume of coverage they have received. Heck, it seems to us the entire world has been forecasting a deep UK recession for the better part of a year now. Those expectations have improved a bit, but the International Monetary Fund, Organisation for Economic Co-operation and Development, Bank of England and others still pencil in a decline this year.^[xvi] So far, GDP has seemingly beaten consensus forecasts by muddling through—a small rise here, a wee drop there—which has seemingly been good enough for stocks.

In young bull markets (long periods of generally rising equity prices), which we think this upturn increasingly looks like, our research finds stocks don’t need perfection.^[xvii] Indeed, we find sometimes they don’t even need consistent growth. When sentiment is low enough, not as bad as projected usually qualifies as positive surprise. And in our view, that positive surprise is what propels stocks up the proverbial wall of worry.