Is the UK’s Covid recovery over already?

Despite some knockout company results recently, latest GDP data is disappointing. Now, experts are asking if the best of the recovery is behind us.

Sluggish GDP figures today added to the confusion for investors after this week's blockbuster performances by Marks & Spencer (LSE:MKS), ITV (LSE:ITV) and Auto Trader (LSE:AUTO) pointed to improving trends.

Third-quarter expansion of 1.3% came in below City forecasts at 1.5%, meaning the UK is still 2.1% smaller than it was at the end of 2019 as one of the back markers in the G7 recovery.

There was some cheer in September's figure of 0.6%, but this is more likely to have been due to a temporary boost from pandemic restrictions easing. Paul Dales, chief UK economist at Capital Economics, added: “Continued shortages and the drag on real incomes from higher utility prices probably mean it will soon fizzle out.”

Having risen by 5.5% in the second quarter, the fear for Dales and others in the City is that the best of the recovery is now behind us and that GDP will struggle for momentum over the winter.

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Without the 4.7% month-on-month jump in health output as a result of more face-to-face GP appointments, Dales notes that GDP would have risen by only 0.1% in September. 

The lacklustre performance comes only a week after upbeat markets were confidently predicting that the Bank of England will hike interest rates from 0.1% in order to seize the initiative in the battle to stop inflation becoming entrenched.

Today's figures go some way to explaining why policymakers hesitated, although they may choose to act next month if the first set of unemployment figures to include the end of furlough scheme are sufficiently robust.

Capital Economics is not expecting a flurry of action from the Bank, however, and thinks the base rate won't go above 0.5% next year. Such restraint would represent a blow for lenders including Lloyds Banking Group (LSE:LLOY) as they look to rebuild their net interest margins, but offers some encouragement for retailers if cheap borrowing costs continue to prop up demand.

The recent earnings season has painted a more optimistic picture than today's GDP figures, with last week's strong numbers from Next (LSE:NXT) followed by upgraded guidance at Marks & Spencer.

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Shares in the retail bellwether surged 15% yesterday and added another 2% to 231p this morning to reach their highest level since mid-2019, fuelled by a combination of self-help measures and improved trading conditions.

Peel Hunt today raised its target price to 260p: “M&S may never again scale the heights it enjoyed years ago, but that does not mean it cannot be a very worthwhile investment.”

Supply chain disruption still poses one of the biggest threats to the recovery of M&S and other consumer-focused stocks, but so far it appears the sector has been able to cope. B&M European Value Retail (LSE:BME) said today it was fully stocked for the “Golden Quarter” after ensuring that stocks were ordered earlier than usual.

It still remains fearful of inflationary pressures at the start of 2022, a factor highlighted yesterday by the US consumer prices index reaching a bigger-than-expected 6.2% in October.

But a closer look at the Baltic Dry Index, which is the widely used measure of global shipping rates, offers some encouragement after a big fall from the three-decades high seen in early October.

The index is now back to where it was in the summer and has been accompanied by an easing in natural gas prices in Europe as Russia boosts supplies ahead of winter.

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These factors should settle nerves at the US Federal Reserve, where policymakers continue to insist that inflationary pressures are temporary. They have no immediate plans to increase interest rates, but Wall Street isn't so sure and is pricing in a potential rise for next summer.

High inflation and the prospect of aggressive Fed tightening is not a good combination for US risk, with the Dow Jones Industrial Average down 0.7% last night. Gold prices benefited as a refuge from the rising prices, reaching a 20-week high at $1,859 an ounce.

The heightened interest rate expectations meant the US dollar strengthened further to leave the pound at its lowest level since December at $1.33. With 77% of revenues in the FTSE 100 from overseas, this helped to drive the top flight to a fresh post-pandemic high at 7,367.85.