UK equity markets wobbled early in December as investors tried to assess the potential impact of the new Omicron variant of Coronavirus. Concerns over its rapid spread spurred the governments of the UK’s home nations to impose varying levels of restriction on living, working and socialising, triggering fresh worries over the outlook for the struggling hospitality and leisure sectors.
- FTSE 100 Index has best calendar year since 2016
- UK inflation reaches 5.1% YoY
- First rate increase since 2018
Question-marks over Omicron: UK equity markets wobbled early in December as investors tried to assess the potential impact of the new Omicron variant of Coronavirus. Concerns over its rapid spread spurred the governments of the UK’s home nations to impose varying levels of restriction on living, working and socialising, triggering fresh worries over the outlook for the struggling hospitality and leisure sectors. The Organisation for Economic Co-operation & Development (OECD) warned that Omicron could cause additional disruptions to the supply chain and exacerbate inflationary pressures.
“BoE policymakers tightened rates for the first time since August 2018”
Best year since 2016: the FTSE 100 Index rose by 4.6% over the month, reaching its highest level since February 2020 during December amid rising investor optimism that Omicron might prove less severe than initially feared. Over 2021 as a whole, the index rose by 14.3%, achieving its best calendar year performance since 2016. In comparison, the FTSE 250 Index climbed by 4.6% over December and 14.6% over the year. During the month, Dechra Pharmaceuticals and Electrocomponents joined the FTSE 100 Index, displacing Johnson Matthey and Darktrace, which were added to the FTSE 250 Index.
Inflation remains a focus: higher costs for transport and energy drove up the UK’s annualised rate of consumer price inflation from 4.2% in November to 5.1% in December, representing its highest rate since September 2011, when it stood at 5.2%. The International Monetary Fund predicted that inflation will rise as high as 5.5% during 2022 and urged the Bank of England (BoE) to “avoid inaction bias” in dampening inflationary pressures.
Rate increase: during December, BoE policymakers tightened rates for the first time since August 2018, raising the key base rate by 15 basis points to 0.25%. The BoE warned that Omicron could curb economic growth in December and in the first three months of 2022, exacerbating existing disruption to supply chains and staffing levels. The Monetary Policy Committee is widely expected to implement further tightening measures over 2022.
Disappointing economic data: investors were disappointed by lacklustre GDP figures released during December. The UK economy expanded by only 0.1% in October; moreover, it expanded more slowly than initially estimated during the third quarter of 2021, according to the Office for National Statistics (ONS), which revised down its growth calculation from 1.3% to 1.1%. The ONS reported that the UK economy remains 1.5% smaller than its pre-pandemic level.
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