UK GDP Preview: What does it mean for the FTSE?

The UK economy is expected to have surged forward in the fourth quarter of 2021, giving the BoE more room to tighten policy until inflation is under control.

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GDP & inflation

How the market might react to Thursday’s data needs to be considered in the context of the BoE's latest monetary policy moves.

After months of denying inflation was getting out of hand, the BoE is now playing catch-up, taking an aggressive stance to bring prices back under control. At the last meeting, the debate was between raising rates 25 basis points or 50 basis points, and the former won out by a thin margin.

A growing economy is understood to contribute to increased inflation generally, and raising interest rates aims to tamp down an overheating economy. So, if there is a fast expansion in the UK's GDP, it would be expected to contribute to inflationary pressure. More rapid growth means the BoE can take more action without slowing the economy too much.

Economists expect the UK's Q4 GDP growth to settle at 1.1% q/q and 6.4% y/y. GDP is forecasted to have contracted -0.6% on a month-on-month basis in December, reflecting a rather downbeat consensus.

The state of UK stocks

Top flight UK stocks have returned to pre-pandemic levels and have been moving higher since the last BoE meeting. Higher interest rates are negative for the most highly-valued parts of the stock market, but the FTSE 100 and FTSE 250 have been undervalued since the 08 financial crisis and continued to be after Brexit. The lifting of virtually all covid restrictions has given more optimism for businesses as well.

Britain’s GDP is projected to return to its pre-pandemic trajectory now that the size of the economy has returned to pre-pandemic levels. But for now, growth remains elevated alongside rising prices – and that means pressure on the Bank of England to raise rates. Higher interest rates stand to benefit the big banks especially, which report earnings the week after next – but also other cyclical /value parts of the UK stock market. All else equal, given their large weighting – these sectors should be able to lift the FTSE if the data is well-received.

Of course, when thinking about the performance of the FTSE 100, it’s wise to also consider Sterling. Many of the biggest UK-listed companies make their money outside of the United Kingdom and benefit from a weaker local currency when reporting earnings. Should there be a meaningful move up in GBP in response to a strong GDP number, it might be that the multinationals pull the index lower.

What's Next for UK 100?

The UK 100 index has been bid since the bottom of the covid crash, up 60% from 4790 to 7650. It soared to 2-year highs this week after rebounding off 7000 and its 50-week moving average in December.

The late-January pin bar spotted on the weekly chart has given bulls the possibility to revisit all-time highs and break out to 8000 for the first time. A break below the 50-week MA would make the index more susceptible to a dip towards prior range lows at 6800.

Source: Spreadex Trading Platform

Key Takeaways

Strong UK GDP data should support banks and other cyclical stocks within the FTSE 100 because it supports the case for higher interest rates. However, a strong reaction in the British pound could hinder the performance of multinationals.