Surprise! The UK Isn’t in Recession

Sometimes just going from ‘terrible’ to ‘mediocre’ is enough for markets

Surprise! The UK Economy Isn’t in Recession

Merryn’s got a new podcast out today. You really should listen to this one (I know, I always say that, but they’re always must-listens) — she’s chatting to Alexander Chartres of Ruffer, who is one of the smartest and most engaging macro thinkers in the market. Listen here now.

The UK is plagued by strikes, Brexit, political instability, crumbling institutions, and more recently, royal emotional incontinence. Our stock market is shunned. Our gilts market is a laughing stock (though a profitable sideline for the Bank of England.) No wonder we are widely deemed to be The Most Awfullest Place in The World (TM).

And yet. The FTSE 100 is currently a decent trading day away from hitting a fresh all-time high. (It’s worth remembering that the FTSE 100 is a high-yield index, so its pitiful performance in capital gains terms is not quite as bad as it looks if you add back reinvested dividends.)

Meanwhile the mid-cap FTSE 250 is now back in bull market territory, believe it or not, having rallied just more than 20% from its low on October 12.

More bafflingly still for many, the much-heralded recession — and the apparent agreement that we’re already in one — might not actually ever appear. November’s GDP reading came out this morning and showed that the economy actually grew during the month, contrary to expectations.

The World Cup had something to do with that. But it’s not as if that major global sporting event sprang out of nowhere. It’s also really only a reversal of the situation in September, when the bank holiday for the Queen’s funeral artificially depressed growth. You can’t logically say “ah, but…” for one without acknowledging the other too.

It’s All About Expectations

What’s going on? As we often point out here, markets are all about expectations. Simon French of Panmure Gordon puts it very simply: “Such was the bearish sentiment surrounding the UK economy in late 2022 that the hurdles for a GDP upgrade cycle in 202 are not that high.”

The UK has been priced for disaster for a long time. So even going from terrible to just mediocre is an improvement.

To be clear, this doesn’t mean the UK will definitely avoid a recession. (In truth, we won’t find out definitively for many years, because these figures are always being revised, which is why you should take them with a cardiologically inadvisable amount of salt.)

But the point is, things aren’t as bad as everyone had thought. This incidentally, like most of the “bad” things, is a global story. The outlook for Europe isn’t as grim as everyone thought either, and same goes for the US.

However, the key difference between the UK specifically (though it’s true for euro-area stocks too) and the US is the one factor that really does matter for investors. The correlation between economic growth and stock markets is tenuous at best and certainly not something you can use to time any investments.

But there is a more reliable correlation between how cheap stocks are when you buy them, and the eventual return you get from them. In the US, stocks are still expensive. In the UK, they’re not. And given that many people still seem to be struggling to adjust their perceptions — no one in my Twitter feed seems keen to absorb good news on the UK economy, for example — there’s still plenty of time to seek out cheap and detested UK stocks before they become expensive and loved again.

Welcome to Money Distilled. I’m John Stepek and every week day I’ll be looking at the biggest developments in the world of markets and economics, and explaining exactly what it all means for your money.

Original article here: https://www.bloomberg.com/news/newsletters/2023-01-13/surprise-the-uk-isn-t-in-recession

Author: John Stepek, Senior Reporter, Bloomberg

Simon French

Managing Director, Head of Research