UK economic growth rebounds, but can it avoid a recession?

The latest estimate of monthly UK GDP, was stronger than expected for November at 0.3%, versus a decline of 0.3% in October. The growth rate in November was driven services, but also by decent monthly expansion for the industrial and manufacturing sectors.

The November figures suggest that while parts of the UK economy are able to cling to positive territory, it is only by the smallest of margins. There was nothing exciting in these figures, with most sectors of the UK economy experienced no growth in the penultimate month of the year.

For November, water, construction, finance and insurance and education all saw slight declines in growth on the month. The risk is that bad weather in December will have added more downward pressure to the construction sector at the end of the year, which could make it difficult for the UK to avoid a technical recession.

A technical recession for the UK economy is still on the cards

The stronger than expected November figures could not halt the rolling three-month measure from tipping deeper into negative territory at -0.2%, compared with a 0% rate for October. This means that the UK economy will need to have a stronger than expected December to avoid a falling into a technical recession, after Q3 growth was -0.1%.

What next for the consumer

The bright spots in the November data included manufacturing and industrial production, which both saw growth expand in November, and the service sector, which registered monthly growth of 0.4%. While these are small gains, it shows that growth was not only driven by the service sector, which could help the UK economy in 2024, especially as there are growing signs that the UK consumer was feeling the pressure at the end of the year.

The 3-month rolling rate for the index of services, which is a key driver of the UK economy, was flat in November, which suggests that if the UK is to avoid a negative quarter of growth, then December service growth will have to do the heavy lifting. So far, signals about the strength of the consumer have been mixed, with signs that consumers were willing to pay for recreational activities and seasonal ‘fun’, but less willing to buy general goods and clothing. This clouds the outlook for December service growth.

Construction was weak in November, however, the silver lining in the report was that the stronger than expected industrial and manufacturing production figures may have helped to improve the trade deficit, the visible trade balance was expected to come in at -£3bn, however, it was actually just over -£1.4bn.

Houthis strikes could prove a headache for central bankers

GBP slipped slightly on this data, however, the key events for major stock and currency markets today will be the reaction to the US and its allies including the UK, who launched airstrikes on Houthis rebels in Yemen in retaliation for attacking ships in the Red Sea.

This has knocked sentiment towards risky assets at the start of Friday’s trading session, and stock markets are expected to open lower. The oil price was boosted by the military action, and the Brent crude oil price is at its highest level of the year so far above $79 per barrel, at this point it looks like a return to $80 per barrel could be on the cards. The rising oil price is stoking fears that a soft economic landing won’t be possible for the global economy if oil prices continue to advance. This adds to pressure on central bankers: do they cut rates and protect growth, or do they focus on the inflationary effects of rising oil prices, that have already pushed up headline inflation rates in the West? Overall, armed strikes in Yemen could make it hard for the Fed to cut rates in March.

How long will the military action last?

It is worth putting the market reaction into context. So far, market moves on the back of these airstrikes have been mild, but whether or not markets react further could come down to what comes next. President Biden said on Thursday evening that the US and its allies will not hesitate “to direct further measures” i.e., airstrikes to protect the flow of international commerce.  The real risk is that this leads to a proxy war between Iran and the US. The Houthis rebels are backed by Iran, and Iranian officials condemned the US airstrikes overnight.

Japan stocks ignore geopolitical tensions and march higher

While European and US stocks are pointing to a weaker open, the Nikkei continues its march higher. It rose by 1.5% on Friday, easily ignoring the geopolitical risks. The Nikkei is on course to have its best week since March 2022, as it tries to reach its record high just below 40,000, from 1989.

China CPI could lead to more stimulus from Beijing

Chinese CPI was also weaker than expected, and fell for the third straight month, and the annual inflation rate in China is -0.3%. This is a slight improvement on November when the inflation rate was -0.5%. This data could put more pressure on the PBOC and the Chinese authorities to add more stimulus to the economy, which they have room to do, although they have been wary to add too much support to the faltering Chinese economy so far.