Markets will need to keep a watchful eye on how the UK economy fares after the latest GDP figures showed overall growth of 7.5% for 2021 but a slowdown in the final three months of the year.
Figures from the Office of National Statistics showed that overall, the UK economy grew by 7.5% year-on-year, marking the fastest growth of all G7 countries. However, the fourth quarter saw growth slow to 1%, 0.1% behind market expectations, as the Omicron variant put a brake on recovery.
GDP fell by 0.2% in December alone as the retail and hospitality sectors were particularly affected by consumer caution amid the spike in Covid cases.
The ONS said the GDP level in the months October to December is now 0.4% below its pre-coronavirus level in the fourth quarter of 2019.
Industry experts said UK markets will need to keep a watchful eye on recovery going forward, amid rising inflation and the impact of future monetary policy, and investors cannot afford to come off high alert.
Paul Craig, portfolio manager at Quilter, said: “The UK has enjoyed a strong bounce back in GDP in 2021 but growth has tempered in Q4, not helped by the impact of Omicron on the service sector. However, the past is exactly that and it will be imperative to watch inflation and monetary policy to gauge the likely impact on future growth.
“Inflation has taken root and although it might not be long lasting at its current elevated levels, we do expect it to be a feature over the coming 12 months. This ultimately threatens the economic recovery and the UK’s ability to grow at a sustained rate.”
Derrick Dunne, CEO of YOU Asset Management, commented: “UK GDP grew by 1% in the final quarter of 2021. While some might dismiss the numbers covering October to December as being outdated, they’re actually rather significant in uncovering the impact of the Omicron variant and the resulting Government restrictions on the economy.
“The figures don’t present huge cause for concern but do show why investors cannot afford to come off high alert. With growth expected to have been slow in January and yet more monetary policy changes predicted next month, we are likely to see more volatility in the months ahead.”
The decline in growth during the fourth quarter prompted AXA Investment Managers to predict further drops in January as Omicron continued to weigh on output. As a result, AXA IM has downgraded its forecasts for UK growth in 2022 to 4.3% from 4.9% and 2.1% from 2.5% in 2032.
Modupe Adegbembo, G7 economist at Axa Investment Managers, said: “With GDP slipping only modestly in December, this vindicates the Bank of England’s decision to tighten monetary policy in February and leaves a March hike a possibility. However, on balance we expect the Bank to delay the next hike until May and expect rates to reach 1% in August where we expect them to stay – far short of market expectations.”
Uncertainty surrounding the Bank of England’s next move is likely to dominate markets after four members of the Monetary Policy Committee took a hawkish approach and voted for a 0.5% rise to curb inflationary expectations during the last meeting.
Jesus Cabra Guisasola, senior associate at Validus Risk Management, commented: “Sterling could outperform both the US dollar and Euro if the Bank of England outstrips market expectations and hikes faster than expected. On the other hand, the pound could come under pressure if policymakers realise that multiple hikes would not solve a problem linked to other factors outside of Bank of England’s control, such as higher energy prices and bottlenecks in the supply chain.”
Amid the economic uncertainty, Ian Warwick, managing partner at Deepbridge Capital, has called upon the Government to support small businesses.
Warwick said: “SMEs may struggle to access finance as rates rise, subsequently GDP growth will potentially remain low in a time where growth is essential. It therefore remains critically important that scale-up businesses, particularly in high-growth sectors such as digital technologies and life sciences, are given the necessary support they require as they will be at the very heart of the UK’s economic regeneration.
He added: “Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios.”
