Interactive Investor

Market snapshot: latest slump in UK GDP is no surprise

12th March 2021 08:09

Richard Hunter from interactive investor

Lockdown had an inevitable impact on the economy, but businesses were better equipped to cope this time round.

Better-than-expected economic readings and a transitory easing of inflation concerns are enabling some relief for markets generally.

Contraction for the UK economy was inevitable in January as the current lockdown went into full force, with the GDP reading down by 2.9%. Unsurprisingly, the services sector was hardest hit, declining by 3.5%. However, the headline figure was far better than the expected decline of 4.9%, implying that businesses were better equipped to cope with latest lockdown. The construction sector actually managed to post a gain of 0.9%, with some more recent data suggesting that that given the success of the vaccination rollout, January could mark the lowest point this year overall.

Brexit also came into effect in January and the hit to the UK’s import and export figures was stark. However, it is too early for a definitive read of the Brexit effect, with some evidence of stockpiling ahead of the deadline, and signs of some recovery towards the end of the month indicating that the picture could be rather more positive after the initial dust has settled.

The FTSE 100 index has broadly continued its slow but unspectacular progress as some evidence of international investor interest, in what is increasingly seen as an undervalued index, begin to emerge. Now ahead by 4% in the year to date, the prospect of brighter economic times to come as pent-up demand is released is also playing into increasingly positive sentiment towards the UK as an investment destination.

In the US, the signing of the $1.9 trillion American Rescue Plan ends months of speculation as to whether the package would pass through government, and is likely to turbocharge the nascent economic recovery. Whether the plan may actually overheat the economy remains to be seen, especially with the latest jobless claims figure also showing further progress.

For the moment, however, fears of inflation have taken a back seat, with the return of some appetite for growth stocks, and big tech in particular which had been caught in the crosshairs of a rotation towards more cyclical stocks over the last few trading sessions.

As such, the Nasdaq index regained some lost ground and now stands ahead by 4% in the year to date, while the S&P500 has added 4.9% and the Dow Jones 6.1%.

The continuing success of the vaccination rollouts in the coming weeks should further focus attention on the likely speed and strength of the economic recoveries to come.

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