UK February GDP: Not Great, but Still No Recession

Another month in the books, and the widely expected UK recession still hasn’t materialized: February monthly GDP was flat, leveling off after January’s upwardly revised 0.4% m/m rise.^[i] Under the hood, the results were even more encouraging. We don’t think it is a surprise for stocks, given the UK has outperformed by a country mile since global stocks’ low last October, but it is worth a quick look to see what markets may have been pricing in.

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

In the services categories more sensitive to customer demand, the results were strong. Wholesale and retail trade rose 0.1% m/m, adding to January’s 0.6% rise.^[iv] This echoes strength in retail sales reports, which showed sales volumes rising. Some pooh-poohed this as a figment of discounting, but the same crowd moaned when sales volumes slipped amid higher prices last year. You can’t have it both ways, and if consumers are regaining buying power, 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 curbed last year.^[v] 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 (soccer) last year.^[vi] Meanwhile, real estate services output was flat, suggesting some stabilization after spiking mortgage rates slammed the industry late last year.

So, lots of silver linings here. But also, a caveat: This is all backward-looking, and consumers have to reckon with increased living cost pressures from April on thanks to another stealth tax increase. Mercifully, energy costs aren’t soaring on top of that, and the household energy price cap should fall later this year. Household living costs aren’t soaring like they were this time last year. 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.

Crucially, however, stocks are well aware of this. The household tax burden has been a hot topic for a couple years now, as has lagging wage growth. The strikes are also factored into expectations. Heck, it seems 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 IMF, OECD, Bank of England and others still pencil in a decline this year. So far, GDP has beaten expectations by muddling through—a small up here, a wee down there—which has been good enough for stocks. In young bull markets, which this increasingly looks like, stocks don’t need perfection. Heck, they don’t even need consistent growth. When expectations are low enough, not as bad as feared usually qualifies as positive surprise. And that positive surprise is what propels stocks up the wall of worry.