The latest numbers for economic growth are disappointing. In May, the UK economy grew by a small 0.8% compared to the month before as per government numbers released earlier today. Last month, growth was at 2%.
What do the numbers tell me?
Coming out of a sluggish time, it would have been good to see accelerating growth over time. But the latest numbers suggest that the economy is weaker than was anticipated.
Nevertheless, all is far from lost. The Office of National Statistics (ONS) says that these numbers are “subject to more uncertainty than usual”. So I would take the slowing down with a pinch of salt. Of course it is possible that the decline is much worse than it appears, but that is unlikely.
Also, some growth segments have done well. The reopening of pubs and restaurants has meant a huge 34% growth for the segment. The pharmaceuticals segment grew by 25%, largely because it had fallen sharply last month. Demand for electricity, gas, and air conditioning grew by 5.7% on “adverse weather conditions” as per the ONS.
What do they tell me about my investments?
In any case, I think exactly one month’s numbers should not be used as a guide to assess how my stock market investments will perform. At least a quarter’s numbers should be considered. As the details above show, there are too many one-off reasons for a spike in some segments, like reopening, a poor base, or weather conditions.
However, we now have five months of data for 2021. It has shown improvements, but nowhere near the kind of spectacular growth that many forecasters including the Bank of England (BoE) have projected for this year. The BoE actually expects 7.2% growth for 2021. For this to happen, growth will have to be much faster in the second half of the year.
It can happen, as travel reopens and there is a consumer splurge in the summer, followed by the festive season in the final quarter of the year. But we will also witness a winding down of the furlough scheme and many businesses are in pretty poor shape. We will know soon how things actually play out. Until such time, I am not worried for my investments.
What should I buy?
The latest numbers do encourage me to consider the hospitality sector, which has seen a big boost because of the reopening. I am not rushing to buy any pub stocks yet, however, for this reason. Since the numbers themselves are subject to change, I would wait a month or two before assessing their performance. Further, there was a lot of coronavirus-related damage to the hospitality segment’s finances, which suggests that it will take them a while to recover. They are on my watchlist for now.
Instead, I would selectively invest in stocks of companies that are in healthy sectors and are in good financial shape themselves as well. A number of FTSE 100 stocks in segments ranging from healthcare to mining look good right now. I would consider buying these instead.
