GDP recovery may be short lived

The jump in monthly GDP growth, to 0.9% month-on-month in November, takes GDP above its pre-pandemic level. However, the emergence of the omicron variant means that it probably fell by around 0.5% m/m in December and this would leave Q4 GDP growth at 1%. 

GDP is likely to remain subdued in January as a result of worker absences, though there are early signs that consumers ventured back out after Christmas. We therefore expect all the output lost in December to be made up in early 2022, so we’re still forecasting GDP growth of about 4.5% in 2022 as a whole. 

The policy takeaway: Brace for a rate hike next month

At the margin, November’s GDP suggests that there is now less spare capacity in the economy, making an interest rate hike more likely at the next Monetary Policy Committee (MPC) meeting on 3 February. 

Admittedly, GDP likely fell in December and the quarterly measure of GDP, which the MPC focuses on, is lagging behind the monthly measure. The squeeze on spare capacity therefore won’t be as strong as implied by the monthly data. 

But given its desire to shore up its inflation-fighting credentials, there’s a clear argument for the central bank to act ahead of the spike in inflation that will come in April. That leaves a rate hike in February looking increasingly likely.

Behind the data 

Strong growth in all of the economy’s major sectors was reflected in the 0.9% rise in GDP in November. 

The services sector grew by 0.7% m/m, boosted by a gain in professional and scientific activities and stronger retail sales as consumers brought forward some Christmas shopping. But output in consumer-facing services was still 5% below its pre-coronavirus levels. 

Consumer-facing services were likely hit hard by the government’s plan B restrictions and staff absences, so output in sectors like recreation, food and accommodation and education will probably drop back in December. 

The 1.1% lift in manufacturing output suggests that the easing of supply shortages, especially in the automotive manufacturing sector, is filtering through into higher output. Car output rose by 7.8% m/m in November, but even so the manufacturing sector is still 2.2% below its pandemic level. 

Finally, construction output soared by 3.5% m/m as an unusually mild and dry November and easier access to materials allowed firms to ramp up production: Growth was entirely driven by an increase in new construction work, and construction output is now 1.3% above its pre-pandemic level. 

 

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