Three Lessons From a Recession That Never Was
The UK’s December GDP figure came out this morning, which means that we also got the all-important fourth-quarter GDP number.
The monthly figure was rubbish. No doubt about that. GDP fell by 0.5% in December, much of which was due to strike action, and the post-World Cup comedown.
We still haven’t recovered to pre-Covid levels of GDP either, which puts us alongside Russia and behind every other big economy. However, for the quarter, growth was flat. In turn, that means we haven’t had two quarters in a row of shrinking GDP. And so, according to this particular GDP estimate at least, the UK wasn’t in recession last year.
Good question. GDP figures are subject to constant revision. Three months or five years from now, it might turn out that we were in fact in recession this whole time and no one knew.
Better yet, the idea that two quarters in a row of GDP shrinkage is a “technical recession” is basically made up. There is no official definition, as this Office for National Statistics blog points out. So why does any of it matter?
Three Lessons For Investors
I’d say there are three useful and related “takeaways” here for investors.
First, question what you read. For the best part of six months, we have seen headline after headline declare — often emphatically — that the UK was in recession, despite this being demonstrably wrong, even at the time.
At best, you could have said: “we may well be in recession, but we don’t know yet.” As it now turns out, on the facts as they currently stand, we were not in recession. These facts may yet change (!) — but those headlines were still wrong.
Furthermore, I can guarantee you that if this number had come in just a tiny bit lower, and the “technical recession” had been achieved, we’d have seen headlines about “Britain’s recession” all weekend. Something as simple as a rounding error could have entirely changed the presentation of this data set, and resulted in a much gloomier overall tone to the coverage.
There are logical reasons for this. GDP is an almost uniquely political economic figure. It functions as a bit of a scorecard for whichever government is in power. And because that tends to be the primary focus of the news media, GDP is given a level of attention that other, arguably more important, or at least more forward-looking statistics, don’t get.
And yet, it’s irrelevant for markets because it’s backward-looking and markets care about tomorrow, not yesterday. And it’s not even particularly relevant for you or I as individuals, because we know what’s going on in our own lives — I don’t need to be told there’s a cost-of-living crisis to see that my energy and food bills have gone up.
In short, as an investor, don’t take what you read on trust, and if a piece of data is genuinely important to you, go to the source and check it yourself.
Talk is Cheap
Second (and somewhat connected) is this: sentiment is cheap. Focus on facts. If you’d been paying attention to consumer confidence or the general “feels” about markets and the UK specifically during the fourth quarter, you wouldn’t have touched stocks with a ten-foot bargepole.
UK consumers report feeling more nervous than they were in 2008. I repeat. People are claiming to be more nervous than they were in 2008, which was that time — some of you may remember it — when the entire financial fabric of the known world ripped like a gossamer veil, revealing the yawning meaningless void behind it.
Anyway, if you’d ignored the sentiment indicators and instead taken the time to look at what individual companies were reporting, and at what (slightly) more granular economic data was indicating, and at the trends in things like mortgage rates and energy costs, then you’d have realised there was a gap between “vibes” and reality.
Third, and finally: despite the genuine wisdom of crowds, it’s incredibly easy for the consensus to be wrong, because of groupthink. The UK, for various reasons, is currently in the bad books with all “thinking people.” The resistance to viewing it through any other lens helps to skew coverage and also investment attitudes towards the country.
Here’s a bit of evidence to back that up. Simon French at Panmure Gordon (who is becoming my regular “go-to” source on this sort of thing) put out an interesting piece of research yesterday, which noted the “clear disconnect between what UK public companies are saying, and the general thrust of economic commentary.”
French notes that this appears to have led to the share prices of UK-listed companies being hit harder than their peers if their earnings disappoint, and rising by less than their peers if they beat forecasts. That sounds a lot to me like investors are ready to have their prior beliefs confirmed, and are not so sure how to react when they are confounded. They are psychologically primed to be “short UK.”
French is very ambivalent about what this means. “Whether this is an opportunity, or an undermining feature will depend on perspective — but it has been going on too long for this author’s comfort.”
By contrast, this author (i.e., me) has a die-hard value streak, and given that value is finally coming back into fashion (fingers crossed), I still suspect the UK discount will fade over time.
My usual disclaimer: I am not saying that everything is fabulous. I’m just saying that not every recession is a depression. And this might even end up being neither.
Author: John Stepek, Bloomberg UK
Managing Director, Head of Research