UK May GDP Basked in the Sun

Breaking news: The UK had lovely weather in May. That, in our view, is the primary takeaway from UK GDP’s 0.4% m/m rise that month, which took headlines by storm. Many called it evidence Britain’s economic recovery is deep-rooted and here to stay … then got a bit sad at the prospect of this delaying Bank of England rate cuts. We think it is all a bit over the top. Not to pooh-pooh a nice GDP report, but this is all old news for stocks, and monthly GDP wobbles a lot. We wouldn’t read much into its swings, good or bad.

After UK GDP started 2024 strong, it stalled in April. Not because the economy suddenly weakened, but because one of the wettest Aprils in memory made the month a washout for several industries. Retail trade and hospitality got hit hard as people stayed home and dry, falling -1.3% m/m and -0.8% m/m, respectively.^[i] Construction also got rained out, falling -1.1% m/m.^[ii] As a result, there weren’t many positives to offset manufacturing’s -1.6% m/m drop as Red Sea shipping pressures temporarily hit demand.^[iii] Hence, April GDP was a flat 0.0%.^[iv]

But May was warm! The warmest since record-keeping starts in 1884, as it happens! This brought construction workers back to job sites and revelers back to the high street. Retail trade jumped 1.8% m/m, hospitality surged 2.4% higher and construction gained 1.9%.^[v] Add in manufacturing’s partial comeback (0.4% m/m) and growth elsewhere in the services sector, and UK GDP grew 0.4% in the month.^[vi]

By all means, hoist a pint. We have no doubt businesses throughout the country enjoyed the surge in demand. But we don’t see much for investors to glean here. When the weather can play such a big role in skewing the results month to month, it is hard to get a read on longer-term trends. The delay at which monthly GDP come out adds to this. We sit here today, parsing this report, in mid July. We know the Brits basically dealt with the return of winter in June, which private-sector measures suggest knocked retail sales again. July has been another deluge, with the tarps seemingly spending more time on Wimbledon’s courts than the players this year. Will that take down July’s GDP? Or will England’s epic run in Euro 2024 generate enough pub traffic and food sales to counteract it? What of the election’s possible effects?

Seasonal adjustments can only do so much on this front. Their purpose is to account for—and smooth out—normal patterns recurring year to year. They factor in things like winter weather in January and February. Black Friday and holiday shopping. Back-to-school spending. The post-holiday shopping slump. Annual major sporting events. But unseasonable weather can throw them for a loop. And they get flummoxed by quadrennial events like the Euros. We saw this late last year, too, when England’s World Cup run temporarily boosted the data.

So we are always inclined to take UK monthly GDP with a grain of salt. We appreciate the insight into the ups and downs that even out into a quarterly result. But it is more an academic appreciation than a this is really great insight for investing appreciation. It also tends to simply confirm what timelier and less wobbly indicators already showed. Purchasing managers’ indexes (PMIs) are one example. Though they aren’t perfect, either—they are surveys showing the percentage of businesses reporting growth, not output measures—they come out at month end, and the respondents are pretty good at parsing trends from weather. The official retail sales report, out a few weeks after month end, is also good about crediting (and blaming) weather where due. And because these reports are narrower, they tend to generate less breathless coverage than a big monthly GDP report.

But even here, the information is all backward-looking, confirming what stocks already lived through and priced in. Markets look about 3 – 30 months out. Reports on economic activity two months ago don’t tell you what will happen over the next year or two. All they can do is give us a sense of the trend.

Which is fine, in this case, because it is nice to have confirmation that UK stocks weren’t out over their skis as they rose amid an economic slump late last year. Rather, markets were pricing in the recovery recent data show is underway. The foundation supporting that recovery is plenty strong, in our view, as businesses are digesting higher rates and wage growth is easing cost-of-living pressures. Waning political uncertainty helps, too, regardless of the new faces in 10 Downing Street.

So cheer UK stocks for these forward-looking reasons. Not because the sun smiled on UK GDP two months ago.