What does today’s GDP data mean for UK interest rates?

There was little to shout about in terms of economic growth this summer, but inflation is rising fast. Here’s what the pros think, as well as shares on the move today.

The tangled state of the UK's pandemic recovery probably left investors scratching their heads today, after housebuilding stocks and the FTSE 250 index both rallied sharply, despite official figures revealing that economic activity slowed to a crawl this summer.

GDP grew by a lacklustre 0.4% month-on-month in August and actually contracted in July for the first time outside of a lockdown, meaning output still sits 1.1% below its pre-Covid level.

One economist said the latest official figures left the Bank of England “in a pickle” as policymakers balance the undershooting of growth forecasts with the need to tackle significant inflationary pressures. Bank of America's Robert Wood continues to look for a December hike in interest rates, despite cutting his third-quarter growth forecast to 1.6% today.

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He said “the heady days” of V-shaped recovery talk now seemed a long time ago after seeing the previously speeding UK economy hit a wall of supply shocks since early summer.

That's been reflected in the performance of the UK-focused FTSE 250 index, which has reversed 7% after hitting a record high at the start of September. But the second tier bucked the trend today to rally 1% compared with a much weaker session for the FTSE 100 index.

The outperformance had a lot to do with the bullish update from Barratt Developments (LSE:BDEV), which reported that trading strengthened in September and October compared to last year and compared to July and August. Liberum said the statement was “surprisingly good”, especially given that Help to Buy was used for 51% of transactions last year versus 21% this year.

There were also few signs of major supply chain disruption, with the blue-chip company continuing to expect build cost inflation in the region of 4-5%. Barratt shares surged 6%, while Crest Nicholson (LSE:CRST), Bellway (LSE:BWY) and Vistry (LSE:VTY) were ahead 3% in the tier below, as investors welcomed much-needed evidence of robust demand from the UK consumer.

The bounceback for the FTSE 250 also reflected some of the detail of the GDP release, with leisure, hospitality and other consumer-facing service sectors doing well in August as people socialised more after July's “pingdemic”.

Capital Economics noted that the 10.3% month-on-month rise in restaurants and hotels output took activity in that sector above its pre-pandemic level for the first time. And the 8.5% increase in arts and entertainment output left it just 0.8% below its pre-pandemic peak.

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Cineworld (LSE:CINE) shares rallied 6%, while shares in Magners owner C&C (LSE:CCR)also improved 2%.

The hospitality gains more than offset a 1.6% month-on-month fall in wholesale and retail output, a decline that may just reflect a rebalancing back towards the services sector as people capitalised on so-called Freedom Day in July.

Car production was 14.5% below its February peak, but the 6.6% month-on-month rise for August was the third in a row to suggest that semiconductor shortages may be easing.

Paul Dales, chief UK economist at Capital Economics, is not expecting much improvement in GDP over the coming months before an acceleration from mid-2022 and into 2023: “We suspect shortages will be a bigger drag on GDP in September and October – the petrol crisis probably prevented some people from getting to work.”

His forecast for the third quarter points to 1.4% growth quarter-on-quarter, which compares with the 2.1% rise forecast by the Bank of England just last month. Dales added: “So while the chances of a rate hike this year have risen recently, a weaker activity outlook means it's not a done deal.”