The UK economy performed much better than expected in Q4 as the slip in growth in December due to Omicron was far more moderate than previous Covid waves. December’s GDP fell by 0.2% MoM, compared with expectations of -0.5%, to keep overall output at pre-pandemic levels (Feb 2020).
This is a stark improvement on January 2021, where the UK economy contracted by 2.9% due to the arrival of the Delta variant. A slight downgrade to November’s GDP estimate from 0.9% to 0.7% meant that Q4’s preliminary quarterly growth rate printed at 1%, leaving the YoY figure at 6.5% – 0.1% higher than the BoE projected in its February Monetary Policy Report. The impact of Omicron and the subsequent tightening of restrictions is visible in services output, which fell by 0.5% in December. Unsurprisingly, this was largely due to the 3% MoM contraction in consumer-facing services output as the deterioration in the health backdrop resulted in greater consumer hesitancy and lower mobility. Offsetting the decline in services output was the 0.3% rise in production and 2% increase in construction, however, the largest upwards contributor was human health and social work activities which contributed 1.07% to GDP in December. This, along with the 0.43% contribution by professional scientific and technical activities, was largely due to the increase in health services activity in December as testing, vaccine distribution, and tracking all picked up pace. Specifically, the NHS test and trace and Covid-19 vaccination programme had a 0.7% impact on GDP in December as activity in these services increased by 51% and 19% respectively.
While the data is mired by the impact of Omicron, the December GDP release highlights the first signs of the shifting sources of growth within the UK economy.
We expect consumer spending, especially in consumer-facing services and discretionary goods, to remain soft in the early parts of 2022 at least due to falling real household incomes and inflation concerns, while growth is likely to be driven by CAPEX, an increase in exports, and rebounding production and manufacturing sectors.
This shifting source of growth is partly visible in real-time data indicators, such as the Bank of England CHAPS data.
The aggregate spending data highlights over the course of January how spending remained soft in discretionary items, such as delayable goods and social activities, while the rolling back of Plan B restrictions and rising prices of core goods resulted in work-related and staple spending to increase.
Bank of England CHAPS data shows spending remained soft in January for discretionary areas
The market impact of today’s data release was minimal, which is as you’d expect given the lagged nature of the data and the more pressing market dynamics in play.
However, today’s data will give the Bank of England some breathing room as faster sequential momentum reduces the recession risk from faster policy tightening – this risk is currently priced in by forward swaps and the underlying SONIA curve.
Simon Harvey, Head of FX Analysis