UK GDP Beats Estimates, But Recession Risk Remains

The UK stock market rebounded higher after economic data showed an unexpected acceleration in the country's GDP and a larger-than-forecast reduction in the trade deficit.

Downward Revision Keeps Risk of Recession Intact

According to the UK's Office of National Statistics (ONS), the UK GDP expanded by 0.3% in November, exceeding the market consensus of 0.2%. While the initial figure suggested the country may avoid slipping into recession in the second half of the year, downward revisions to prior months' figures highlighted that the risk of recession remains present. The three-month rolling growth rate came in at -0.2%, below the predicted -0.1%, marking the first contraction since the end of 2023. The ONS also emphasised that the economy has shown limited expansion over the last year, and two consecutive quarters of slowing output would technically place the UK in a mild recession.

The data provided a counterpoint to manufacturing production figures released simultaneously, offering certain economists reasons for heightened optimism. While the GDP expansion was primarily attributed to growth in the services sector, manufacturing production reversed its prior declines and rose to 0.4% for the month, beating estimates of 0.3%. Economists pointed out that an expected reduction in interest rates implied that the economy may have avoided a recession and has an upside bias.

Market Rebounds, But Timespan Remains Uncertain

Initial reactions suggested the FTSE 100 would open trading in positive territory, partly thanks to the data and buoyed by upbeat corporate performance. The rise in the flagship index mirrored other European bourses, benefiting from lower bond yields ahead of the unofficial kick-off of the corporate reporting season. Still, economists highlight that the economic data remain muddled and ongoing weakness in the hospitality and travel sectors may indicate continued strain on consumer confidence from the rising cost-of-living crisis.

The November GDP figure benefited from an unexpected drop in the trade deficit, driven by imports falling faster than exports. However, this could be a cause for concern, suggesting a slowing economic dynamism. That was also reflected in the production component of the GDP report, which showed an output increase of 0.3% in November. However, it followed a downward revision in the UK's production in October to -1.3% from -0.8% initially.

While encouraging, continued recovery is far from guaranteed, given the many geopolitical and economic headwinds. Market participants will scrutinise forthcoming data and company updates for signs of whether this rebound turns out to be a lasting upturn or a temporary respite in increasingly choppy waters.

Footsie Bounces off Lower Rising Flag Boundary

The FTSE 100 reveals a classic short-term rising flag pattern, indicative of a potential bullish confirmation above the peak at 7760 post-completion. With prices having retraced to 7570 and by the lower channel, a decisive breakout above 7700 could set the stage for higher levels. However, downward pressure could exert an increase in bearish bets to 7535 and 7485, exposing the bottom at 7260.

Source: SpreadEx UK100

Key Takeaways

The UK's GDP growth in November exceeded expectations, rising by 0.3% against the anticipated 0.2%, and manufacturing production also surpassed forecasts, providing a glimmer of hope for economic resilience. Despite this, the UK faces the risk of recession due to downward revisions of past data and overall weak growth over the year. While the FTSE 100 initially reacted positively, mirroring European gains and benefiting from a surprise drop in the trade deficit, the outlook remains uncertain. The UK's economy still grapples with sector-specific weaknesses and broader geopolitical and economic challenges.