This morning’s release of UK GDP data for November saw economic activity more than double the consensus estimate with a print of 0.9% MoM. In addition to this, October’s monthly GDP reading was revised upwards from 0.1% to 0.2%.
Overall, the data confirms that activity levels have now risen back above pre-pandemic levels, and Q4’s data will highlight this as long as December’s GDP estimate doesn’t show activity contracting by more than 0.2%, although a long road remains to return to the level of activity projected by the pre-pandemic trend. Over the course of November, services output increased by 0.7% MoM, production by 1%, and construction by 3.5%. This leaves only production below pre-pandemic levels, at a rate of 2.6%. Sub-components of the services number shows activity in consumer-facing services is still 5% below pre-pandemic levels, which is only likely to deteriorate into December given the onset of Omicron and the pullback in spending in high-contact activities.
However, spending in other components has resulted in services activity sitting 1.3% above pre-pandemic levels.
While we expect services activity to slow heading into December, not only due to reduced demand for high-contact activities but also a fading out of retail sales as seasonal shopping was brought forward to November to avoid supply disruptions ahead of Christmas, the more robust economic momentum heading into the Omicron phase in December and January is undoubtedly a positive for financial markets.
Although the pound exhibited a rather dull reaction to the release, mainly because traders have bigger fish to fry in the sense of the GBPEUR resistance level and broader bond market dynamics, we think today’s data will act as the first confirmation point ahead of next week’s data deluge for the Bank of England to embark on another rate hike at February’s meeting.
The probability of a Feb rate hike from the BoE has held around the 80% level for months now, while we expect data next week to push this higher along with front-end Gilt yields
Author: Simon Harvey, Senior FX Market Analyst